Question

Why is it important to study and understand accounting? Explain the accounting equation and define its terms.

Answer 1

Accounting is a simple term which in general meaning to keep track of the things, or to measure them and then take appropriate decision based on the accounted information. Accounting means the process of record financial transaction and summarizing them and then report them to the internal and external users who make appropriate decision based on the accounted financial information. Accounting process began with a voucher, which is recorded through general entry and then posted in ledger and trial balance is constructed through ledger balances and then closing entries are posted and adjusted closing trial balance is created and financial statements are prepared from adjusted closing trial balance.

The following is the accounting equation

Assets = Liabilities + Shareholder Equity

Explanation of accounting equation terms

Assets = assets refers to the items from which future economic benefit are derived For eg land, account receivable. Assets are of two types Current and Non Current.

Liabilities = liabilities are the items for which payments has to be made in future whether is cash or kind For eg. loans, account payable. Liabilities are also of two types current and noon current liabilities.

Shareholders equity = These are equity section which comprises of capital contributed by shareholders and profit /(loss) earned by business is also part of this section only. For eg. common stock and retained earnings.