As we saw in Section 3.2, the accounting equation, extended to include income and expenses, can be expressed as follows:
A – L= C+ (I – E)
This equation can be rearranged as A+ E =C+ L+ I according to the rules of mathematics.
The next activity should help you to understand the importance of both forms of the accounting equation.
Activity 21
A business has assets of £110,000, liabilities of £30,000, income in the year of £20,000 against expenses incurred of £10,000 and capital at the beginning of the year of £70,000. Using the two forms of the accounting equation, insert these figures into each equation to show that the equation holds true in both cases.
Answer
Each form of the equation is correct as both sides of the equal sign in each case would have the same figure.
In the first form of the accounting equation, A – L= C+ (I – E), the answer would be:
£80,000 (£110,000 – £30,000) = £80,000 (£70,000 + (£20,000 – £10,000))
In the second form, A+ E =C+ L + I, it would be:
£120,000 (£110,000 + £10,000) = £120,000 (£70,000 + £30,000 + £20,000)
What is the point of knowing the second form of the accounting equation?
This second form of the equation, i.e. A + E =C + L + I, is very useful to remember as it gives you all the rules of double-entry bookkeeping, including the ones for income and expense accounts.
Assets (A) and expenses (E) are on the left side of the equation representing debit balances. The double-entry rule is thus: if a transaction increases an asset or expense account, then the value of this increase must be recorded on the debit or left side of these accounts.
Likewise in the equation, capital (C), liabilities (L) and income (I) are on the right side of the equation representing credit balances. The double-entry rule is thus: if a transaction increases a capital, liability or income account, then the value of this increase must be recorded on the credit or right side of these accounts.
The following T-accounts may help you to learn these ‘golden rules’ of double-entry bookkeeping.
In the final activity of this section, you will need to apply your knowledge of the double-entry rules, the P&L account, the balance sheet and the accounting equation.
Activity 22
Jane Michaela, trading as Michaela Enterprises, has the following closing balances in ledger accounts for her first year in business, the financial year just ended on 31 December 20X7:
- Opening capital £5,000
- Cash and bank £2,853
- Furniture £3,200
- Computers and equipment £2,010
- Debtors £790
- Creditors £1,100
- Bank loan £2,000
- Sales £33,230
- Purchases £21,565
- Rent £6,053
- Heating and lighting £1,256
- Insurance £988
- Office expenses £2,615
- Using the template below, complete the trial balance for the year.
- Using the formula I – E (Income – Expenses), calculate the net profit for the year ended 31/12/20X7 if the closing stock was £200.
- Using the formula C+ (I – E) (Capital + (Income – Expenses)), calculate the capital as at 31/12/20X7.
- Using the formula A – L (Assets – Liabilities), calculate the net assets as at 31/12/20X7.
- What do you notice about your answers to 3 and 4?
Answer
- £33,230 – (£21,565 – £200 closing stock) + £6,053 + £1,256 + £988 + £2,615 = £33,230 – £32,277 = £953 net profit for the year ended 31/12/20X7.
- £5,000 + £953 net profit = £5,953 capital as at 31/12/20X7.
- (£2,853 + £3,200 + £2,010 + £790 + £200 closing stock not included in trial balance) – (£1,100 + £2,000) = £9,053 – £3,100 = £5,953 net assets as at 31/12/20X7.
- The answers to 3 and 4 are exactly the same. This again demonstrates that the accounting equation in the form A – L = C + (I – E) is always true.
Information point
Closing stock is not included in the trial balance as it does not reflect a transaction that has a dual aspect – it is merely the purchases that have not been sold in the year. If there is any opening stock it is included in the trial balance at the year end.
FAQs
ChatGPT can analyze financial data and accounting information to detect suspected anomalies in trends, amounts, or percentage changes requiring further analysis. You can use this insightful information for decision-making.
Can I use ChatGPT for bookkeeping? ›
With its advanced language processing capabilities, ChatGPT can streamline and automate various accounting tasks, saving time and improving efficiency. Through ChatGPT, accountants can enhance their productivity, gain deeper financial insights, and make more informed business decisions.
Is accounting and bookkeeping hard? ›
Is studying bookkeeping hard? While accounting does require a complex set of skills and abilities, as well as excellent attention to detail, it really isn't any more difficult than many of the other popular fields of study that lead to excellent lifelong career opportunities.
Does a bookkeeper need to be good at math? ›
Essential Numerical Skills
As a bookkeeper, you'll have to deal with financial transactions and numbers. You need the ability and confidence to perform basic math, such as: Addition. Subtraction.
Did ChatGPT pass the CPA exam? ›
Key Takeaways. ChatGPT passed a CPA practice exam on its second attempt, according to researchers. Researchers said the study results called into question 'competitive advantage' of the human accountant relative to the machine.
Can ChatGPT replace accounting? ›
However, accountants and bookkeepers need not worry, ChatGPT is not coming for your jobs! ChatGPT in accounting can in fact be used to augment work and assist accounting businesses with smaller micro tasks, as an extension of accounting practice management software.
Can ChatGPT make a balance sheet? ›
Advanced financial analysis with generative AI
ChatGPT can summarize balance sheets, cash flow statements, and other complex financial documents, providing quick insights for decision-making. Because ChatGPT is a form of generative AI, it can produce different types of content.
Can AI do bookkeeping? ›
Some virtual bookkeeping services and accounting software programs use AI to automate repetitive tasks, and workflows including: Recording data in the correct accounting formats. Sorting transactions into categories. Reconciling accounts against bank statements.
Can ChatGPT read a bank statement? ›
You can also use ChatGPT to reconcile bank and credit card statements.
What is the hardest part of bookkeeping? ›
The Internal Impasse: Juggling Priorities and Deadlines
They might be responsible for accounts payable and receivable, payroll processing, bank reconciliations, and generating financial reports — all on top of handling client inquiries and staying updated on regulations. Time management becomes a critical skill.
While AI is reshaping the accounting profession by enabling software to automate some tasks and provide better insights into patterns and inaccuracies, AI is not poised to replace bookkeepers and accountants.
What pays more accounting or bookkeeping? ›
Salaries are typically based on education, certification, years of experience, credentials, industry or employer, job description, location, and complexity of work. According to the U.S. Bureau of Labor Statistics for 2021, the national average salary for bookkeepers was $45,560 and for accountants was $77,250.
Can bookkeepers make 6 figures? ›
But it's true—it's absolutely possible to give yourself a six-figure salary with a bookkeeping business.
Can I be a self taught bookkeeper? ›
You may also pursue certification programs or use online courses to become a self-taught bookkeeper. Self-taught bookkeepers use a variety of courses, seminars, books, and other online resources to learn about bookkeeping and accounting.
Can I be an accountant if I'm bad at math? ›
Experts seem to agree that a lack of confidence in math shouldn't stop you from pursuing an accounting degree if you have good basic skills and a willingness to review and solidify those skills.
Which app is best for solving accounting questions? ›
Accounting Apps Comparison Table
| Company | Best For | Mobile App |
|---|
| FreshBooks | Best Accounting App Overall | Yes, iOS and Android |
| QuickBooks | Best for Comprehensive Features | Yes |
| Zoho Books | Best Workflow Automation | Yes |
| Xero | Best for Freelancers | Yes |
2 more rowsApr 1, 2024
Connect QuickBooks Commerce and ChatGPT to integrate crucial parts of your business. With Zapier, you can integrate everything from basic data entry to end-to-end processes.
Can ChatGPT integrate with QuickBooks? ›
One of the most popular integrations on the platform is between QuickBooks Online and ChatGPT. By integrating these two apps, you can streamline your workflow and automate repetitive tasks.
