Question

1. What is the balance sheet equation and how does it relate to the balance sheet of a business? (Minimum 50 words)

2. You have been studying the most recent financial statements of Auckland International Airport Limited. The equity section of Auckland International Airport Limited contains two main accounts: share capital and retained earnings. Explain how these two accounts are different from each other. (Minimum 60 words)

3. From the scenario described below, indicate (giving your reasons) the most appropriate business form Connor and Ella likely to take — sole trader, partnership or company.

Connor and Ella wish to start an internet business, marketing cosmetics. They are concerned about the legal issues (for example, their personal liabilities) for this business once they start trading. (Minimum 60 words)

Answer 1

1. Balance sheet equation - It is also understood as accounting equation is the basic element of balance sheet and the primary principle of accounting. It states that the sum of owner's capital and company's total liabilities is equal to the company's total assets at a particular point of time and it is fundamental of accounting which provides the basis of double-entry system of accounting. The balance sheet equation is - Asset = Equity + Liabilities.  

The balance sheet displays the company's total assets and how these assets are financed, through either equity or debt. It is based on the balance sheet equation. This formula is intuitive as the company have to pay for all the things it owns by either borrowing money (debt) or taking it from investors (equity). Thus in forming a balance sheet this equation is used as a base and all the adjustments are made accordingly in the precise format of the balance sheet.