VCE · Topic explainer

The accounting equation in VCE Accounting

The accounting equation is Assets = Liabilities + Owner’s Equity. Assets are the resources controlled by the business. Liabilities are its obligations. Owner’s equity is the residual interest after liabilities are deducted from assets. To analyse a transaction, identify what changes and check that the equation still balances.

Worked example

A business starts with $10,000 in assets, $3,000 in liabilities and $7,000 in owner’s equity. It borrows $2,000 from the bank. Cash rises by $2,000 and the loan liability rises by $2,000. Owner’s equity stays at $7,000.

The equation becomes $12,000 = $5,000 + $7,000. Borrowing brings in cash and creates an obligation to repay. For a cash purchase of equipment, one asset increases and another decreases, so the asset total can stay the same.

Before: $10,000 = $3,000 + $7,000. Borrowing adds $2,000 to cash. and $2,000 to liabilities. After: $12,000 = $5,000 + $7,000.

Official exam practice

2018 VCE Accounting, Question 5(b), previous study design

Find other years and marking guidance in the Accounting official exam archive.

Further reading. VCAA current Unit 3 assessment advice