Question

Assets are financed by debt and equity transactions, a concept reinforced by the accounting equation: A = L + E. Since accounts receivable are an asset, are they financed by debt and/ or equity? Explain

Answer 1

Accounting Equation -

Accounting Equation = Assets = Liabilities + Equity

Every company needs to follow the equation to balance the financial statement if the company miss to follow the accounting equation financial statement will not get match.

Every financial statement contains debit and credit transactions of the transactions and balances.

Transactions like Purchase of assets on account -

Assets DR xxxx

Accounts Payable CR                   xxxx

Assets have debit balance as per the golden rules which means debit what comes in and credit what goes out. Debit the receiver and credit the giver. Through this golden rule we can form an account equation.

Explaination -

Assets are financed by debt and equity transactions -

Company primarily starts when the equity contributed by the equity shareholders and partialy by the borrowings. This contributed amounts are then use to acquire assets for the purpose to use to generate sales for the company.

Assets which are financed with equity and liabilities are those assets which includes Property plant and equiment, Inventories and so on.

Accounts Receivables are the assets which generated though credit sales made by the company. Sales are part of Equity and hence that is you can say help to manage the equation to balance the financial statements.

Sales are made on the use of assets which are acquired by the use if Equity and liabilities and hence all the assets are financed by the equity and debt.