Question

State the “accounting equation” and define each of its terms

Answer 1

The accounting equation can be written as,

LIABILITIES = ASSETS - SHAREHOLDER'S EQUITY, OR

SHAREHOLDER'S EQUITY= ASSETS - LIABILITIES

TERMS:

1. ASSETS: An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. Assets are reported on a company's balance sheet, and they are bought or created to increase the value of a firm or benefit the firm's operations. An asset can be thought of as something that in the future can generate a cash flow, reduce expenes, improve sales, regardless of whether it's a company's manufacturing equipment or a patent on a particular technology.

2. LIABILITIES: A liability is a company's fianancial debt or obligations that arise during the course of its business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses.

3. SHAREHOLDER'S EQUITY : The shareholder's equity portion of the accounting equation could be calculated by summing the amount of share capital and retained earnings and subtracting the amount in treasury shares from the sum. The equation could be written as: share capital + retained earnings - amount in treasury shares.