Accounting equation back to front?

Uncleboobot

I am currently doing my AAT level 3 diploma in Accountancy and I am interested to learn if there is a specific reason why the equation is taught (from a very early stage) as Assets = Capital + Liabilities. The following is an extract from my course book.

"The Statement of Financial Position shows the relationship between the elements that comprise the accounting equation, i.e. Assets= Capital + Liabilities. On preparing the Statement of Financial Position, however, we often change the order in which we present the elements within the equation as, quite often, the Statement of Financial Position is presented in a format whereby it shows Assets less Liabilities = Capital."

So what is puzzling me is why aren't we taught the equation as A-L=C right from the very start. The fact that it is an equation means that it makes little difference how it is presented, for example it could also be L=C-A or any other such variation, but if the aim is to prepare financial statements in the A-L=C format, would't it just make most sense to teach it that way from the outset? Don't get me wrong, I'm not losing any sleep over it, it's just intriguing.
Thank you.

mcchoc

A = C + L
A - L = C
A - C = L
A + a = C + L + l
A +(a-l) = C + L
(where a = current assets, l = current liabilites)

Casu

So what is puzzling me is why aren't we taught the equation as A-L=C right from the very start. The fact that it is an equation means that it makes little difference how it is presented, for example it could also be L=C-A or any other such variation, but if the aim is to prepare financial statements in the A-L=C format, would't it just make most sense to teach it that way from the outset? Don't get me wrong, I'm not losing any sleep over it, it's just intriguing.
Thank you.

You say yourself it doesnt matter how the equation is presented - well surely in some respects thats the point. Its the AAT trying to get folk to use their basic maths skills and think for themselves as you would have to in a real life situation. Bit like the other times when basic maths caculations need to be used - VAT gross/net, marks ups and margins and the many more.

Bertie

At a guess: Alphabetical order.

Mike Webster

Hi @Uncleboobot

You do ask some interesting questions.

In response to your question: "Why aren't we taught the equation A-L=C right from the start?" I know many tutors use this right from the start as part of the 'setting the scene' and identifying different types of account. I know that everyone I teach with ensures that the Accounting Equation is taught and referred to right from day one.

Maybe you need to be asking your provider this particular question?

You're right, the equation could be put in a different order and, indeed, at Level 3 you may need to do this to help answer incomplete records questions. I am amazed how many people forget the basics when tackling such questions - everything hinges on account types, double entry and an understanding of the effect of a debit/credit on accounts.

Sadly, too many students try to learn to pass assessments instead of learn to understand unit content. Your questions are great because they demonstrate that you're thinking about things and not just ticking boxes. Keep asking them!

Good luck

Casu

Mike Webster said:

Hi @Uncleboobot


Sadly, too many students try to learn to pass assessments instead of learn to understand unit content. Your questions are great because they demonstrate that you're thinking about things and not just ticking boxes. Keep asking them!

Good luck

spot on Mike!

Uncleboobot

Mike Webster said:

Hi @Uncleboobot

You do ask some interesting questions.

Your questions are great because they demonstrate that you're thinking about things and not just ticking boxes. Keep asking them!

Good luck

Thank you Mike. (Most people just think I'm a pest, but) you are right. I really do want to understand the process/theory. I guess its just the way my brain is wired - thanks for noticing and for responding

Adele69

I took a look at my Osbourne Books for Bookkeeping 1 Tutorial (Level 2) from a couple of years ago, page 12 on Financial Statements:

what the statement of profit or loss shows
INCOME minus EXPENSES equals PROFIT

what the statement of financial position shows
ASSETS minus LIABILITIES equals CAPITAL

This never bothered me but Non Current Assets, Net Current Assets and Net Assets did. The first is obvious but still get the other two confused.

Uncleboobot

Hi Adele,

From what I have understood:

Net Current Assets = Current assets (Sit Down Pretty Black Cat)- Current liabilities
Net Assets = Non current Assets + Net current assets

I'm sure somebody more clued up than I will come along and explain it better.

Mike Webster

Uncleboobot said:

Hi Adele,

From what I have understood:

Net Current Assets = Current assets (Sit Down Pretty Black Cat)- Current liabilities
Net Assets = Non current Assets + Net current assets

I'm sure somebody more clued up than I will come along and explain it better.

Net Assets = Non-current Assets + Current Assets - Current Liabilities - Non-current Liabilities

so:

Net Assets = Capital (Equity)

mcchoc

Or

Net assets = 'what have we got, less what do we owe'?

Adele69

So is Net Current Assets = Current Assets - Liabilities (Current and Non-Current)
or is it only when looking at Net Assets that Non Current Liabilities are deducted?

It doesn't seem consistent.

mcchoc

Net Current Assets = current assets minus current liabilities (shows liquidity)

Net Assets = All assets minus All liabilities. (effectively, Capital)

MichaelNorton

Because Assets = Liabilities + Capital puts all of the money in items on the left and all of the money out items on the right.

if the left goes up its positive money and a debit if the right goes up its negative money and a debit (and vice versa for reduction)

It is a much neater way of going about double entry bookkeeping

Assets - liabilities = capital is only the statement of financial position and from the point of view of the owner. But double entry bookkeeping is from the point of the company due to the business entity concept which is the major failing of assets - liabilities = capital.

It sounds like a pedantic point but if you do not start from this and get the business entity concept sorted you will end up resorting to DEAD CLIC.