| Accounting Equation |
Article Index for Accounting |
Website Links For Accounting |
Information AboutAccounting Equation |
| CATEGORIES ABOUT ACCOUNTING EQUATION | |
| generally accepted accounting principles | |
| accounting scholarship | |
|
The basic accounting equation is the foundation for the Double-entry Bookkeeping System : : Meigs and Meigs. ''Financial Accounting, Fourth Edition''. McGraw-Hill, 1983. p.19. It shows how ) or by paying your own money ( Shareholder's Equity ). For example, say a student buys a computer for $945. This student borrowed $500 from his best friend and saved another $445 from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445. The formula can be re-written: : Meigs and Meigs. ''Financial Accounting, Fourth Edition''. McGraw-Hill, 1983. p.20. Now it shows that owner's interest is equal to property (assets) minus debts (liabilities). Since in a company owners are shareholders, owner's interest is called shareholder's equity. HOW IT WORKS Every accounting transaction affects at least one element of the equation, but always balances. Simplest transactions also include: Accounting equation explanation with examples , accountingcoach.com. Transaction Shareholders' Number Assets = Liabilities + equity --- - --- - 1. + 6,000 +6,000 2. +10,000 +10,000 3. + 900 -900 4. + 1,000 -450 + 550 5. + 700 + 700 6. - 200 - 200 7. + 100 - 100 8. - 500 - 500 9. + 200 -200 Explanation of transactions: # issuing stocks for cash or other assets; # buying assets by borrowing money (taking a loan from a bank or simply buying on credit); # selling assets for cash (in essence, it's just an exchange of one asset to another); # buying assets by paying cash and by borrowing money; # earning revenues; # paying expenses (e.g., rent or professional fees) or dividends; # recording expenses, but not paying them at the moment; # paying on a debt that you owe; # received cash for sale of an asset These are some simple examples, but even the most complicated transactions can be recorded in a similar way. This equation is behind Debit s, Credits , and journal entries. BALANCE SHEET An elaborate form of this equation is presented in a Balance Sheet which lists all assets, liabilities, and equity and makes sure it balances (thus its name). HISTORY Luca Pacioli is notable for including the first published description of the method of keeping accounts that Venetian merchants used during the Italian Renaissance, known as the Double-entry Accounting System . Also, David Flath asserts that Japanese merchants have used double-entry accounting for centuries assets= liabilities+capital+ ( additional investments + revenue or income - withdrawals -expenses or losses REFERENCES |
|
|