Accounting Equation

Accounting Equation

This means that the accounting equation must balance all the time. Every transaction has a dual effect on the accounting equation. If the accounting equation does not balance then a company’s financial reports will not make sense and it will assist the accounting department to keep track of financial transactions. In order to understand and be able to read a balance sheet, it is important to understand the accounting equation and what it is made of. The accounting equation and the balance sheet are related in that the components of the lance sheet are made by using the accounting equation.

The components of the accounting equation are what make up the information in the balance sheet. When a transaction occurs, the total assets of the business may change but the equation will remain in balance. The equation serves as the basis for the balance sheet (Kismet, P. D. ). In order to maintain the balance that was mentioned above each business transaction that is made has an effect on at least two of these components. For example, if a company borrows money from a lender, the company’s assets will increase but the company’s liabilities ill also increase by the same exact amount.

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