The basic accounting equation is Assets = Equity + Liability.
It is also known as the balance sheet equation. The double-entry
bookkeeping system is founded on this very equation, as it represents that
the total credi
...
The basic accounting equation is Assets = Equity + Liability.
It is also known as the balance sheet equation. The double-entry
bookkeeping system is founded on this very equation, as it represents that
the total credit balance equates to a total debit balance.
An accounting transaction is a business activity or event that causes a measurable
change in the accounting equation. An exchange of cash for merchandise is a
transaction. Merely placing an order for goods is not a recordable transaction because
no exchange has taken place. In the coming sections, you will learn more about the
different kinds of financial statements accountants generate for businesses.
In the previous section we described specific types of accounts that business activities
fall into, namely:
1. Assets (what it owns)
2. Liabilities (what it owes to others)
3. Equity (the difference between assets and liabilities or what it owes to the
owners)
These are the building blocks of the basic accounting equation. The accounting
equation is:
ASSETS = LIABILITIES + EQUITY
For Example:
A sole proprietorship business owes $12,000 and you, the owner personally invested
$100,000 of your own cash into the business. The assets owned by the business will
then be calculated as:
$12,000 (what it owes) + $100,000 (what you invested) = $112,000 (what the company
has in assets)
Assets = Liabilities
112,000 = 12,000
In a sole-proprietorship, equity is actually Owner’s Equity. If the business in question is
a corporation, equity will be held by stockholders, which uses stockholder’s equity but
the basic equation is the same:ASSETS = LIABILITIES + EQUITY
For Example:
A business owes $35,000 and stockholders (investors) h
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