How Do Expenditures Impact the Accounting Equation?
The accounting equation is assets equal liabilities plus owner’s equity. Every accounting transaction must keep the accounting equation balanced. When a company makes a capital expenditure, it pays cash for the expenditure. Cash, or assets, is decreased. A capital expenditure becomes an asset, so the assets increase for this same amount. No impact is made on liabilities or owner’s equity. When a company makes a revenue expenditure, it uses cash to pay a current expense. Cash, or assets, is decreased. Expenses decrease owner’s equity. They do not impact liabilities.
