Accounting Equation

Accounting Equation

The accounting equation for a sole proprietor is assets equal liabilities plus winner equity and for a corporation the equation is assets equal liabilities plus stockholder equity. A company’s assets include accounts receivable, cash, prepaid insurance, inventory, buildings, and equipment. Assets in the accounting equation must be equivalent the liabilities plus owner or stockholder equity. Liabilities in a company equate to obligations or debt such as loans, taxes, salaries, or accounts payable (Kismet, Wesleyan, & Skies, 201 1).

Balance Sheet The balance sheet is a reflection of the accounting equation because it splays liabilities, assets, and equity at a specific time. In a balance sheet, like the accounting equation, assets will equal the liabilities of a company plus equity. Components of the accounting equation, such as payments, loans, stock, rent, and cash affect the balance of the credit and debit sides of the equation. If an individual decides to invest in business the investment will increase the company’s assets and decrease the owner’s equity.

If the company decides to borrow money for equipment in the business the Meany’s asset and liabilities will increase but when the loan is paid his assets and liabilities will decrease. When a company increases revenue the assets and equity also increase. At the end of the month or quarter the company will balance the accounts by adding or subtracting assets and liabilities (Accounting Equation, 2013). Conclusion The accounting equation relates to the components of the balance sheet by showing liabilities, assets, and owners equity in balance.

Please follow and like us:
Haven’t found the essay you want?