Accounting Equation Paper

The accounting equation which we know as Assets equals to Liabilities plus Equity for a sole proprietorship and for a corporation we know it as Assets equals to liabilities plus stockholders & equity. Assets are company owned, liabilities are what company owes and the difference between the both of them is the owner’s equity, these three things are what the companies are measured by in the financial field. In order to understand them more clearly and how the accounting equation shows a simple way of understanding the three amounts relating to one and another, which are the assets that include cash, account receivable, equipment.

Then the liabilities include notes payable, accounts payable and salaries payable. Finally, owner’s and stockholder’s equity includes common stock and retained earnings. The accounting balance sheet is one of the biggest financial statements used by accountants and business owners, these are income statements, cash flow statements, and stockholders equity statements. Balance sheet allows the creditor to see what a company owns as well as what he owes. These are very important things for someone to know for potential investors and others.

So as we know, the balance sheet reflects the accounting equation, it shows the reports of company’s assets, liabilities, and owner’s and stockholders’ equity. If a company keeps their records up to date and accurate, the accounting equation will always be in balance, showing that the left side should always equal to the right side. This keeps the balance sheet balanced since all assets are financed either by equity or liabilities and also the accounting equation serves as the basis for the balance sheet.

The balance sheet shows that the assets are on the debit side and liabilities and equity are on the credit side, so the accounting equation formulates in a way where the total debits should always equal the total credits. Every accounting equation has its effects on the accounting equation, because every transaction alters the components presented in the equation, in a way that the equation is satisfied after each modification.