What is accounting equation?
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From a large multinational company to a small boutique, every business transaction will have an effect on company’s financial position. The company’s financial position is based on following item: Assets, Liabilities and Capital or Shareholders equity.
Now the question arises that what do assets, liabilities and capital means?
Assets are cash, properties, or things of value owned by the business. It can be considered as a tangible and intangible wealth of company that is capable of being productive. While liabilities refer to the amount which business owes to creditors. It is considered as commitments or responsibilities of the entity. And capital is owner’s investment or net worth. It creates liability for the business. The accounting equation is the foundation of double entry bookkeeping.
ACCOUNTING EQUATION= ASSETS= LIABILITIES + CAPITAL
The accounting principle shows that all the assets are financed by the sum of the amount borrowed and amount invested by the equity owners. The balance sheet is a complex display of this equation, showing that total assets of the company are equal to the total of liabilities and shareholder equity of the company. Hence, we can say that accounting equation is the systematic form of representing company’s status.
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