Question

State the “accounting equation” and define each of its terms. What is the logic behind this equation? How is the structure of the balance sheet related to this equation?

15-200 words and no plagiarism please.

Answer 1

The accounting equation also known as balance sheet equation is the relation between the assets, liabilities and capital of a business. This equation states that the assets of a business is equal to the total of liabilities and capital of the business. Capital is the equity and equity is considered to be the shareholders or owners equity.

Now the equation can be described as :-
Assets = liabilities + Equity

Aso, the fundamental accounting equation for the balance sheet equation is the foundation/base for the double entry bookkeeping system.

The terms of the "accounting equation" can be defined as follows :-

• Assets : any property, plant, machinery or equipment owned by the business which have a future value and is used for the business are known as the assets of the business.
• Liabilities : are the borrowings weather long-term or short-term obtained by the business and have to be paid off in future are the liabilities of the business.
• Equity/capital : it represents the shares owned by the shareholders. Equity is also defined as the difference between the Assets and liabilities of the business. Equity = Assets - Liabilities

Using the accounting equation the difference between the Assets and liabilities + equity is cleared.

The logic behind the accounting equation is to follow the double-entry bookkeeping system. Using this equation every financial transaction is entered into two places in the books as a debit and as a Credit. This accounting equation helps keep the financial statement correct and fair.

Balance sheet is such formed there any difference in assets can be seen as a difference in liabilities and vice versa.