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Business & economics · University

Accounting equation

A resource controlled by an entity from which future benefit is expected.

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Prerequisites

Basic arithmetic and percentages.

Study notes

Asset

A resource controlled by an entity from which future benefit is expected.

Liability

A present obligation expected to require resources to settle.

Equity

The residual interest after liabilities are deducted from assets.

Accounting equation

The relationship Assets = Liabilities + Equity.

Worked examples

Which term best matches this description: A resource controlled by an entity from which future benefit is expected.

Asset is the matching concept in this lesson.

Asset

Which term best matches this description: A present obligation expected to require resources to settle.

Liability is the matching concept in this lesson.

Liability

Check your understanding

  1. Which concept would you apply first in a situation where the residual interest after liabilities are deducted from assets.

    1. Accounting equation
    2. Liability
    3. Equity
    4. Asset

  2. Name the concept described as: The relationship Assets = Liabilities + Equity.

  3. Which statement about Asset is most accurate?

    1. A present obligation expected to require resources to settle.
    2. A resource controlled by an entity from which future benefit is expected.
    3. The residual interest after liabilities are deducted from assets.
    4. The relationship Assets = Liabilities + Equity.

  4. Explain one important difference between Asset and Liability.

Answers and marking guidance

Answers and marking notes
  1. Equity

    The scenario directly calls for Equity.

  2. Accounting equation

    The intended concept is Accounting equation.

  3. A resource controlled by an entity from which future benefit is expected.

    The definition in the lesson notes gives the required condition.

  4. Asset: A resource controlled by an entity from which future benefit is expected. Liability: A present obligation expected to require resources to settle.

    Credit a clear distinction using both definitions and an appropriate example if supplied.

Further reading and review references

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