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How to Solve Accounting Equations

Accounting is a topic which reminds us of the commercial math that we used to have in our HG level. This topic requires lot of calculations and is quite engrossing as well. The more we read about this topic the more we get to know the intricacies involved in solving the problems covered under this. There are certain equations which need to be understood inside out so that the main topic becomes quite easy for anyone to comprehend.

Before we get into the equations we have to get used to the terms used in these equations or rather relation that exists between these accounting terms. Terms like assets, capital and liabilities have to be understood in depth before we could make use of the formulas involved.
Terms like balance of payments or balance of total assets etc needs to be understood as well so that the real calculations become easier to handle. In terms of assets liabilities and capital we do have a working formula and that could be rewritten as per our requirements. The formula that we have with these terms is

Capital = Assets – Liabilities or in case we need to find the liabilities then its just reintroducing the same formula with liabilities as the main term of the expression. The same equation becomes

Liabilities = Assets – Capital

Sometimes the same set of information could be asked in a completely different format and the equation becomes

Assets = Liabilities + Owner’s Equity

The above mentioned relation basically is used when the accounting equation is used mainly for sole proprietorship.
The equation which is prevalent for corporation is little different than others and has a different term used.
The same relation now has to be mentioned from stockholders point of view and thus the relation looks like

Assets = Liabilities + Stockholders Equity
As far the formula is concerned anyone could recall it but to make use of the information from the question and identify which exactly should be taken for asset and what is considered as liability is what one needs to learn and apply.
Liability could be considered as a company’s obligations. So one has to go through the givens in a particular question to find these facts out and then reintroduce these into the equation. In some cases the total assets needs to be understood from whatever movable and immovable subjects are considered from. Once one understands the assets and how much of the outstanding obligations are pending then it becomes easier to make use of the accounting equation.

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From Wikipedia

How to Solve It

How to Solve It (1945) is a small volume by mathematician George Pólya describing methods of problem solving.

Four principles

How to Solve It suggests the following steps when solving a mathematical problem:

  1. First, you have to understand the problem.
  2. After understanding, then make a plan.
  3. Carry out the plan.
  4. Look backon your work.How could it be better?

If this technique fails, Pólya advises: "If you can't solve a problem, then there is an easier problem you can solve: find it." Or: "If you cannot solve the proposed problem, try to solve first some related problem. Could you imagine a more accessible related problem?"

First principle: Understand the problem

"Understand the problem" is often neglected as being obvious and is not even mentioned in many mathematics classes. Yet students are often stymied in their efforts to solve it, simply because they don't understand it fully, or even in part. In order to remedy this oversight, Pólya taught teachers how to prompt each student with appropriate questions, depending on the situation, such as:

  • What are you asked to find or show?
  • Can you restate the problem in your own words?
  • Can you think of a picture or a diagram that might help you understand the problem?
  • Is there enough information to enable you to find a solution?
  • Do you understand all the words used in stating the problem?
  • Do you need to ask a question to get the answer?

The teacher is to select the question with the appropriate level of difficulty for each student to ascertain if each student understands at their own level, moving up or down the list to prompt each student, until each one can respond with something constructive.

Second principle: Devise a plan

Pólya mentions that there are many reasonable ways to solve problems. The skill at choosing an appropriate strategy is best learned by solving many problems. You will find choosing a strategy increasingly easy. A partial list of strategies is included:

  • Guess and check
  • Make an orderly list
  • Eliminate possibilities
  • Use symmetry
  • Consider special cases
  • Use direct reasoning
  • Solve an equation

Also suggested:

  • Look for a pattern
  • Draw a picture
  • Solve a simpler problem
  • Use a model
  • Work backward
  • Use a formula
  • Be creative
  • Use your head/noggin

Third principle: Carry out the plan

This step is usually easier than devising the plan. In general, all you need is care and patience, given that you have the necessary skills. Persist with the plan that you have chosen. If it continues not to work discard it and choose another. Don't be misled; this is how mathematics is done, even by professionals.

Fourth principle: Review/extend

Pólya mentions that much can be gained by taking the time to reflect and look back at what you have done, what worked and what didn't. Doing this will enable you to predict what strategy to use to solve future problems, if these relate to the original problem.

The book contains a dictionary-style set of heuristics, many of which have to do with generating a more accessible problem. For example:

The technique "have I used everything" is perhaps most applicable to formal educational examinations (e.g., n men digging m ditches) problems.

The book has achieved "classic" status because of its considerable influence (see the next section).

Other books on problem solving are often related to more creative and less concrete techniques. See lateral thinking, mind mapping, brainstorming, and creative problem solving.


  • It has been translated into several languages and has sold over a million copies, and has been continuously in print since its first publication.
  • Marvin Minsky said in his influential paper Steps Toward Artificial Intelligence that "everyone should know the work of George Pólya on how to solve problems."
  • Pólya's book has had a large influence on mathematics textbooks as evidenced by the bibliographies for mathematics education.
  • Russian physicistZhores I. Alfyorov, (Nobel laureate in 2000) praised it, saying he was very pleased with Pólya's famous book.
  • Russian inventor Genrich Altshuller developed an elaborate set of methods for problem solving known as TRIZ, which in many aspects reproduces or parallels Pólya's work.

Accounting equation

The basic accounting equation' is the foundation for thedouble-entry bookkeeping system. For each transaction, the total debits equal the total credits.

Assets = Liabilities + Capital

In a corporation, capital represents the stockholders' equity.

Bold text'[Italic text] ==How it works== For example: A student buys acomputer for $945. This student borrowed $500 from his best friend and spent another $445 earned from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445.

The formula can be rewritten:

Assets − Liabilities = (Shareholders or Owners equity or Capital)

Now it shows owner's interest is equal to property (assets) minus debts (liabilities). Since in a company owners are shareholders, owner's interest is called shareholder's equity. Every accountingtransaction affects at least one element of the equation, but always balances. Simplest transactions also include:

These are some simple examples, but even the most complicated transactions can be recorded in a similar way. This equation is behind debits, credits, and journal entries.

This equation is part of the transaction analysis model, for which we also write

Owners equity = Contributed Capital + Retained Earnings
Retained Earnings = Net Income − Dividends


Net Income = Income − Expenses

The equation resulting from making these substitutions in the accounting equation may be referred to as the expanded accounting equation, because it yields the breakdown of the equity component of the equation.

Balance sheet

An elaborate form of this equation is presented in a balance sheet which lists all assets, liabilities, and equity, as well as totals to ensure that it balances.


Luca Pacioli is notable for including the first published description of the method of keeping accounts that Venetianmerchants used during the Italian Renaissance, known as the double-entry accounting system. However, recently some historians and experts feel that this was already being used by the Arabs and Muslim traders with whom the Venetians would have had contact. They argue that even though Luca Pacioli formally introduced it to Europe, the credit should still go to Eastern merchants who had been using it years before. This claim is yet to be accepted by the academic community as it forces a rethink of several other aspects in this field.

From Yahoo Answers

Question:Nucore Company is thinking of purchasing a new candy-wrapping machine at a cost of $370,000. The machine should save the company approximately $70,000 in operating costs per year over its estimated useful life of 10 years. The salvage value at the end of 10 years is expected to be $15,000. (Ignore income tax effects.) 1. What is the machine's payback period? 2. Compute the net present value of the machine if the cost of capital is 12%. 3. What is the expected internal rate of return for this machine? Can you help solve this accounting equation?

Answers:This is a corporate finance question.

Question:Journal Entries: Make the journal entry necessary to record the transaction. The company borrowed $125,000 in cash from Far West Bank. I have to set this up as a chart to record activirty on an account. I am not so sure how to do so. Could you please show me how to set up journal entries?

Answers:Debit cash in bank (I assume its deposited in bank) and credit Loans owed Assets = liabilities plus owners equity A debit to the left side of the equation such an asset like a bank account is adding money. A credit would be removing money from it. A credit to the right side of the equation is also adding to those accounts. So when you add to loans owed, you are adding to loans owed or increasing loans owed. As your company makes profits and records them, that grows your owners equity, which a right side account..which means you are adding to your ownership stake in the business. If you pay back a portion of the loan in cash, you woud credit Cash in bank, and debit Loans owed...reducing both of those accounts. This is just a small summary of whats involved. A class would be of use perhaps.

Question:how to record these: 1.a cash deposit of $2580 was paid by cheque and the balance was to be paid in monthly instalment? 2.transferred cash $2000 from personal account into the company account? 3. sold item with book value $9600 for cash $9600. Cash was banked into the bussiness account?

Answers:first you have left something out here -- and second you need to take you homework quesitons to the homework section!!!

Question:Use this data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis is Hickory company managing its receivables better or worse in 2006 than it did in 2005? 2005 2006 Net sales 1,425,000 1,650,000 Net receivables: Bebinning of year375,000 333,500 End of Year 420,000 375,000 Can you help solve this accounting equation

Answers:Open your Accounting 101 textbook and read. Hopefully you are only taking Accounting because you thought it would be an easy class, and are not an accounting or business major. Thank You.

From Youtube

Terms, Principles, Accounting Equation - Part 2 :Discussion of the accounting equation and how to solve for unknown amounts. In addition, there is a short description of retained earnings and how it is affected by net income and dividends. Other videos in this series: Part 1 - Accounting Terms and Principles Part 3 - Revenue Recognition and Matching Principles Part 4 - The Financial Statements and how they are related

Accounting Made Easy 3- Basic Accounting Equation :Gleim Financial Accounting Made Easy is an introductory course that: Improves understanding of the double entry system, ie, the basic bookkeeping process. Teaches you how to prepare and use financial statements using interactive examples. Study Unit 3, The Basic and Expanded Accounting Equations, explains: 1.The basic accounting equation: Assets equal Liabilities plus Equity 2.Assets, 3.Liabilities, 4.Equity, 5.The expanded accounting equation: Assets plus Expenses equal Liabilities plus Equity plus Revenue 6.Revenues, and 7.Expenses.