Accounting
equation is the very basic concept of accounting. Without this, it is
impossible to understand the higher, more complex topics. Thus, when you are
studying accounting equation, it is
best to be proficient and fluent with all concepts and variables of this
particular topic.
It is easier to understand when you have samples and examples
at hand, to work with. Although this equation is basically simple, it is the
foundation upon which the whole world of accounting rests.
The
equation in itself is simple. It says that the assets are always equal to the
liabilities. The liabilities are that of the owner’s and also of the creditors.
This equation holds true for every single transaction, without exceptions or
conditions.
Explanation of the Accounting Equation
The
equation in itself is not very difficult to understand. It says that the total
assets equal the total liabilities. As mentioned above, liabilities can be that
of the owner’s or of the creditor’s. Thus, it can also be said that the total
assets equal the total outside liabilities, along with the total owner’s
liabilities. Outside liabilities is another name for creditor’s liabilities.
Hence, it can also be said that total assets are equal to total creditor’s
equity along with the total owner’s liability. Thus, as a conclusion, it can be
said that total asset equal the total creditor’s equity, along with the owner’s
capital and the total income from which the total expenses must be reduced.
Total
assets = Total creditor’s equity + (owner’s capital + total incomes – total
expenses)
Conclusion of the Equation
When
you are working out the samples of the accounting
equation, it becomes evident that there are some set conclusions and
results that you are bound to see. Every single transaction results or
concludes in an equal effect to asset and liabilities, plus the capital. The
initial balance with which you start is equal and so are the changes that arise
from the equation. By the rules of geometry, the equation can also be written
as Liabilities = Assets – Capital, as was established in the equation mentioned
above, or even Capital = Assets - Liabilities.
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