The Accounting Equation

The accounting equation is a concept that represents that assets are equal to liabilities and equities. Assets are either the owner’s equity or the claims of various creditors against the business. When it is represented in an equation form, it is known as the accounting equation. It can be written in the equation form as under:

 Assets = Liabilities + Equity

 or

 Equity = Assets – liabilities

 or

 Liabilities = Assets – Equity

 The AE shows the foundation of the double accounting system that all debits are equal to all credits.

 Example:

 Scott buys an iPod for $400. He borrows $200 while pays $200 from his own income.

So his assets

 Assets= $200 + $200 = $400

 Scott’s equity = Assets    = $200 – $200 =$20

Scott’s Liabilities = $200 -$200 =$200

 Assets are those things which the company owns like cash, accounts receivable, stock, land, buildings, goodwill, advances, prepaid insurance etc.

Liabilities are things (amounts) which a company owes to others or for which the company is liable to pay to others such as borrowing, accounts payable, wages payable, interest payable, taxes etc.

Owner’s equity which is also referred to as Stockholder’s equity is the amount of the asset after the liabilities or claims of the creditors are deducted.

The Balance sheet represents the accounting equation in which are all the assets shown against the liabilities and equity and both side remain equal.

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