Question

In your own words write and discuses the components of the accounting equation and its importance? and

in which financial statement, we can apply the accounting equation components?

Answer 1

Accounting Equation states that all the total assets will equal the total liabilities and total equity shareholders' equity. It means when a business is stated, the main source of funds will generate from Shareholders' and from lenders (liabilities) so these funds are invested into the assets in order to create revenue by using them. So the total of shareholders' equity and total liabilities will equal to the total assets.

Accounting equation is very important and it is based on the double accounting rule which states that all debits will have an equal amount of credits.

So all assets will have debit balance which will equal to the all liabilities and shareholders' equity which have credit balance. One of the financial statement of Balance Sheet is based on this rule.

Where it has total assets which has an equal amount when compare with total liabilities and total shareholders' equity then only the balance sheet is treated as correct and complete.