If you learn just one thing early in accounting, make it this: the accounting equation. Almost every topic in the IGCSE Accounting course grows out of it.
The statement of financial position, double entry and corrections and adjustments are all this single idea in more detail. Master it now, in Year 9, and the rest of the course is like adding rooms to a house whose foundations are already solid.
The equation
Assets = Capital + Liabilities
In plain words: everything a business owns (its assets) was paid for either by the owner (capital) or by other people it owes (liabilities). There is no third source of money, so the two sides are always equal. Think of it as a rule about where money came from and what it turned into.
The left side lists the resources the business controls. The right side shows who has a claim on those resources. Every unit of value on the left is claimed by someone on the right, so the totals must always agree.
A quick tour of the three parts
- Assets: things the business owns that have value, such as cash, equipment, stock (inventory) and money owed to it by customers who bought on credit (debtors).
- Capital: the owner’s stake. It is what they put in, plus profits kept in the business, less anything the owner takes out (drawings).
- Liabilities: what the business owes to others, such as bank loans and amounts owed to suppliers who let the business buy on credit (creditors).
A memory hook: assets are what you have, capital is what the owner is owed, and liabilities are what outsiders are owed. Capital and liabilities are both claims on the assets. The only difference is who holds the claim.
Why it always balances
Every transaction keeps the equation equal. Watch a small trading business get started. The RM figures are invented to make the idea concrete.
- The owner pays in RM2,000 of their own money. Assets (cash) go up RM2,000 and capital goes up RM2,000. Balanced.
- The business buys a laptop for RM1,200 cash. One asset (laptop) goes up RM1,200 and another asset (cash) goes down RM1,200. Total assets are unchanged, and neither capital nor liabilities moved. Balanced.
- The business borrows RM1,000 from the bank. Assets (cash) go up RM1,000 and liabilities (loan) go up RM1,000. Balanced.
- The business buys stock for RM600 on credit from a supplier. Assets (stock) go up RM600 and liabilities (creditor) go up RM600. Balanced.
Each step keeps both sides equal. Sometimes both sides move together, and sometimes the change happens entirely within the assets, as in step 2. This balancing, repeated across thousands of transactions, is the basis of double entry, which you will meet soon.
The two things that change capital
Capital is not fixed once the owner puts money in. Two everyday events move it up and down, and beginners often overlook them.
- Profit increases capital. If our business sells goods for more than they cost, the difference belongs to the owner. Say it sells stock that cost RM600 for RM900 cash. Cash rises RM900, stock falls RM600, and the RM300 profit lifts capital by RM300. The equation still balances.
- Drawings decrease capital. If the owner takes RM200 cash out for personal use, cash falls RM200 and capital falls RM200. Drawings are not an expense of the business. They are the owner taking back part of their own stake.
Keeping profit and drawings straight is one of the commonest early confusions, so slow down here if it feels shaky.
A common confusion
Many students first think capital is “the cash the business has”. It is not.
Cash is one asset among several. Capital is the owner’s claim on all the assets after liabilities are settled.
A business can hold plenty of equipment and stock yet very little cash, and its capital can still be large. If you are unsure, rearrange the equation into Capital = Assets − Liabilities. That form shows capital is a net figure, sometimes called the owner’s net worth in the business.
Why it matters beyond the classroom
The accounting equation is not just an exam tool. It is the logic behind the statement of financial position that every real company publishes. Owners, banks deciding whether to lend, and suppliers deciding whether to offer credit all read that statement to see how much the business owns and owes.
Once you understand the equation, you can look at any set of figures and ask one question. Does what they own match who has a claim on it?
If it does not, something has been recorded wrongly. That instinct is exactly what accountants are paid for.
Try it yourself
Exercise: A business has assets of RM10,000 and liabilities of RM3,000. What is the capital?
Show the answer
Rearrange the equation: Capital = Assets − Liabilities = RM10,000 − RM3,000 = RM7,000.
Next, get comfortable telling the three parts apart in assets, liabilities and capital.
If the idea still feels slippery, a live lesson often clears it up fast. One of our teachers can walk you through worked examples at your own pace. The equation then becomes an idea that makes sense, not a rule to memorise. Book a trial class.