Accounting and bookkeeping · 18 min

Bookkeeping and the accounting equation

Written and reviewed by Prashant Nandkishor Maheshwari (editorial review, 2026-10-18). Not yet checked by an independent subject specialist. How we review.

What you will learn

State the accounting equation and use it to record simple transactions, and distinguish cash from accrual accounting.

Why it matters

Bookkeeping is the habit of keeping honest records. It underlies tax, business decisions and, historically, accountable stewardship of money.

The ideas

Levels are a learning preference, not a credential. Switch any time.

Novice level

Everything you own or are owed is an asset. Everything you owe is a liability. What is left for the owner is equity.

The accounting equation always balances: assets = liabilities + equity.

Bookkeeping means recording each transaction in an organised way so you can see where money came from and where it went.

Basic level

Double entry records each transaction in two places so the equation stays balanced. Income increases equity. Expenses reduce equity.

Cash accounting records items when money moves. Accrual accounting records them when earned or incurred, even if the money moves later.

Reconcile regularly: compare your records with bank statements and investigate differences.

Advanced level

Learn debits and credits as a convention: assets and expenses increase with debits, liabilities, equity and revenue increase with credits.

Expert level

Accruals, prepayments, depreciation and provisions are judgement areas. Learn why standards require disclosure of the judgements made.

Professional level

Professional bookkeeping and audit follow accounting standards, control frameworks and local licensing rules.

Key terms

Asset: Something of value you own or are owed.
Liability: Something you owe.
Equity: Assets minus liabilities: the owner's stake.
Accrual: Recording when earned or incurred rather than when cash moves.

Worked example

Illustration only: a small new business. (1) Owner puts in 50,000 cash. (2) Buys equipment for 20,000 cash. (3) Borrows 10,000. (4) Does work worth 15,000, not yet paid (a receivable). (5) Pays rent of 5,000. Result: cash 35,000, receivable 15,000, equipment 20,000, total assets 70,000. Liabilities: loan 10,000. Equity: 50,000 + 15,000 - 5,000 = 60,000. Check: 10,000 + 60,000 = 70,000.

Try it yourself

Write five of your own recent transactions and, for each, say which two things changed (for example, cash down and an asset up). Check that your total assets still equal liabilities plus equity.

Nothing you write here is collected. Use paper or the workbook.

Check yourself

Assets 70,000 and liabilities 10,000. Equity is... 60,000 80,000 7,000

Under accrual accounting, work done but unpaid is recorded... When paid When earned Never

A common misunderstanding

'Bookkeeping is just for businesses.' Households that keep simple, honest records make better decisions and handle tax and emergencies more easily.

Local context

Acceptable methods, required records and retention periods are set by local law and standards.

References and review

IFRS Foundation or your national standard-setter, for accounting standards.
Weygandt, Kimmel and Kieso, Financial Accounting (Wiley), standard introductory textbook.

Author and editorial reviewer: Prashant Nandkishor Maheshwari, 2026-10-18. Independent specialist review is pending. Spotted a mistake? Tell us.

Suggested next step

Continue with 'Reading the three financial statements'.

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