The accounting equation in practice
Started 1 month ago
Accounting — HKDSEHKDSE
- Session:
- The accounting equation in practice
- Primary topic:
- Accounting equation
- Level:
- Foundation
- Mastery:
- Verified strong92%
Also covered: Double-entry system
Conversation
You
I keep mixing up capital and cash in the accounting equation.
StudyPath
Capital is not cash — it is the owner’s claim on the business. Assets = Liabilities + Capital. If the business holds HK$80,000 of assets and owes HK$30,000, the owner’s claim is HK$50,000 whether or not any of it is in the bank. Drawings reduce capital; profit increases it.
You
So drawings are not an expense?
StudyPath
Correct. Drawings never appear in the income statement. They come off capital in the statement of financial position. That distinction is examined most years.
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