Question

Explain the accounting equation. What is its role in the analysis of business transactions? Give an example.

Answer 1

Answer:- Accounting Equation:- It describes that the total value of assets of a business is always equal to its liabilities plus owner’s equity. This equation is the foundation of modern double entry system of accounting being used by small entities to large multinational corporations. Other names used for accounting equation are balance sheet equation and fundamental or basic accounting equation. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders.

Accounting equation is simply an expression of the relationship among assets, liabilities and owner’s equity in a business. The general form of this equation is given below:

Assets = Liabilities + Owner’s Equity

For example, if a business has total assets amounting to $300000 and total liabilities amounting to $80000, the owners equity must be equal to $ 220000 as computed below:

Assets – Liabilities = Owner’s Equity

$300,000 – $80,000 = $220000