Accounting Equation

Accounting Equation

The equation is able to illustrate what the company owns versus what it owes. The difference will either be a positive or negative based on how much money the company is making. Broken down, the assets are the company’s resources (what the company owns), liabilities are a company’s obligations (what the company owes), and owner/stockholder equity illustrates the amount of money invested in the company by the owners along with the net income that has not been paid out through dividends yet. The balance sheet is what reports the company’s assets, liabilities, and owner/stockholder equity at any given time.

Entries are made on the balance sheet that correlates with each category of the assets, liabilities, equity. Debits and credits are made based on whether money is coming in or going out; debits on the left and credits on the right. The balance sheet should show that the total amount of assets equals the total amount of liabilities plus owner/stockholder equity. If a company owes more to the owners/ stockholders, it means that they did not make enough money. The assets should always equal liabilities and stockholder equity. Another important statement used is the income statement.

The income statement illustrates a company’s revenues. The result is the net income of the company. The income statement differs from the balance sheet because it covers a period of time rather than a single point. One last important aspect is the general ledger. The general ledger is used to record all of the transactions made by the company. The ledger displays a number of different accounts based on its type to include assets, liability, owner’s equity, revenue, expenses, gains, or losses. Each entry is taken so that it can be tracked and used for input into other financial statements.

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