Accounting Equation

Break even point

5 Accounting Equation Rules Suited For Sole Proprietorships


Accounting procedures for sole proprietorships contain certain differences compared to accounting catered to other corporations. Most corporate accounting services in Singapore are well versed enough to conduct accounting procedures for sole proprietorships. However, as a method of safeguarding and minimising potential errors, business owners are encouraged to remember these 5 accounting equation rules:

  1. Basic

The basic accounting equation for sole proprietorships are calculated with Assets being a sum of Liabilities as well as the Owner’s Equity (Assets = Owner’s Equity + Liabilities). Business transactions for sole proprietorships are recorded into specific accounts that are contained in the corporation’s general ledger. Some of the accounts that users have to pay attention to would be the Temp service expense account, Advertising account, Service revenues, Notes payable, Accounts Payable, Equipment purchase, Accounts receivable, Cash, the Owner’s Equity account and Contra Owner’s Equity account.

  1. Draws

Draws are termed for withdrawal of corporate assets by the owner of the sole proprietorship for personal use. These withdrawal of assets are not considered expenses, and therefore the transactions are not typically reported in the income statements. In the event that withdrawals were made, the accounting equation of the sole proprietorship would reflect the decrease in both assets as well as owner’s equity, thereby making the equation in balance.

  1. Loans

Another factor that affects the accounting equation would be loans from banks. Should the business owner borrow currency, there will be an increase in the sole proprietorship’s assets as well as liabilities. This transaction should be recorded in both the Cash section of the asset account, as well as Notes Payable in the liability account. Do take note that the bank loan is not considered as earned revenue, therefore there will be no effect from this transaction in the income statement. One can however, interpret two sources for the sole proprietorship assets- the owner of the company’s provisions, as well as the creditors (bank).

  1. Earned Revenue

As per standard billing procedures where payment due dates are usually after 30 days, the revenue transaction is not recorded into the capital account just yet despite the fact that both assets and owner’s equity displays an increase based on the payment amount. The amount earned should be recorded under the Service revenues section of the revenue account so that the revenues can be reported into the income statement at any given time and transferred to the owner’s capital account after the year end.

  1. Missing Amount

In the event that there are missing amounts, the accountant may rely on the statement of changes recorded in the owner’s equity to determine the components that are unknown. For example, relying on the draw amount at the beginning as well as end balances of the owner’s equity to calculate and derive the net income value.

5 Accounting Equation Methods Catered For Corporations

With the ever thriving plethora of corporate accounting services in Singapore, it is not uncommon for companies to consider the option to outsource accounting to professional accounting firms. While that may be so, business owners are still highly encouraged to familiarise themselves with the basics of accounting so as to double-check and minimise the occurrence of subtle errors. For starters, here are 5 basic accounting equation examples catered for corporations:

  1. Basic

As a general practice, the basic accounting equation for corporations is denoted with assets being the sum of liabilities as well as Stockholders’ equity (Assets = Stockholders’ Equity + Liabilities). Different transactions will affect the corporation’s accounting equation, balance sheet and income statement in differing ways. Pay attention to the cash amount, accounts receivable, equipment, common stock, notes payable, retained earnings, treasury, service revenues, advertising expense, accounts payable and temp service expense amongst other factors.

  1. Stock

When stocks contain no par value and no stated value, the assets of the corporation as well as stockholders’ equity would increase in an equivalent amount, thereby balancing out the accounting equation. This accounting equation reveals that the source of the corporation assets are from the stockholders. Stocks that have been purchased from the stockholders by the corporation would be stored in the Treasury stock. In situations where corporations purchase their own stock for cash, the corporation’s total assets as well as stockholders’ equity decreases equivalently.

  1. Equipment

Another factor that affects the way the accounting equation is applied would be the purchase of equipment. Equipment purchasing is typically not treated as an immediate expense- the purchase only serves to become a form of depreciation expense only when the equipment has been placed into service. Pay attention to the date where the equipment is placed into service. If it hasn’t been done so, then there would be no expenses in the particular transaction, or earlier transactions when reported in the corporation’s income statement.

  1. Service Revenues (Earned Revenues)

Payment and billing methods differ from case to case. However, most corporations choose to bill their clients and offer a 30 day leeway before the payment amount is due. Once the corporation has performed and completed the service for their clients, this automatically means that the corporation has earned revenues, and reserves the right to receive the agreed upon amount from their clients. In situations like these, the stockholders’ equity in the accounting equation will increase. However, one must take care to note that the revenue transaction is instead recorded in the Service revenues section instead of directly into the Stockholders’ Equity account.

This is usually to provide corporations with the opportunity to report the revenues account through it’s income statement at any given time. The amount located in the revenues accounts will only be transferred into the retained earnings account after the year end.

  1. Temporary Service Expense

If corporations outsource work to temporary help services, the invoice can be recorded immediately while the amount is paid only after a certain amount of days. The accounting equation will then be amended to reveal that the corporation’s liabilities increase whereas the stockholders’ equity decreases by the amount of payment that is owed to the temporary help services. The liabilities incurred should be recorded under the Accounts Payable section whereas expenses should be recorded in Temporary Service Expenses.