General

THE ACCOUNTING EQUATION

Sylvia Hogan Written by Sylvia Hogan · 1 min read >

Firstly, accounting equation is a basic idea of accounting and a root element of the balance sheet. This equation sets the basic of double-entry accounting and gives the structure of the balance sheet. The Equation ensures that the balance sheet remains balanced.

However, straight-forward relationship between assets, liabilities, and owners equity is considered to be the root of the double entry rules.

DOUBLE ENTRY RULES IN ACCOUNTING EQUATION

The double entry rules states that, for every debit entry, there must be a corresponding credit entry or vice versa. This is to say that Debits must equal Credits. The accounting equation which is ASSETS =LIABILITIES – OWNERS EQUITY is agreed to be the foundation of the double entry accounting system. Therefore, the main function of a double-entry account is to ensure that a company’s account remain balanced and can be used to describe what the company’s current financial position looks like. In other words, balance sheet is broken down into three major sections: Assets, Liabilities, and Owners Equity.

https://www.bookstime.com/what-is-the-accounting-equation

UNDERSTANDING THE EQUATION

Assets: These are properties owned by a business. Assets can be classified into tangible assets and intangibles assets, and fixed assets and current assets. Examples are; Cash, Account Receivable, Inventory and Equipment.

Liabilities: Liabilities is money or amount owed by the business. It can be classified into current liabilities and non-current liabilities. Examples are; Account payable, short term borrowings, and Long term debt

Owners Equity: This is a stock owned by individuals or investors in a firm or company. These investors are called share holders. Examples are; Shared capital and retain earnings.

Therefore, assets represents the valuable resources controlled by the company. Both liabilities and owners equity represents how the assets of the company is being financed. If its being financed through issuing shares to investors, then it will reflect in the shareholders equity account.

In conclusion, accounting equation, whether in its basic form or in expansion form shows the relationship between the left side and the right side. That is to say, that it is important to remember that the equation must always balance.

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Sylvia Hogan

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