How Can We Explain The Accounting Equation?


2 Answers

Bilal Ahmad Profile
Bilal Ahmad answered
The three basic fundamentals of bookkeeping are assets, liabilities and owners' equity (capital). The assets represent the things of value that a business owns. The liabilities are the claims of the creditors adjacent to those assets. The owner's equity (capital) is the claim of the owner against those assets. Whatever is not claimed by the creditors belongs to the owner. As a result, the total claims against the assets are always equal to the total assets, this equality between the assets and the liabilities and the owner's equity expressed by the "accounting equation".

Assets = Liabilities + Owner's Equity.The two sides of the accounting equation must always be equal because the rights to all the assets of a business are owned by someone. The creditors have a claim against the assets of a business until the liabilities have been paid. The owner has a claim against the remaining assets of the business. If no liabilities exist, then the owner's equity will equal to the total assets.

A clear understanding of the accounting equation is essential, because most of accounting systems based on it. The equation actually identifies the claims (or rights) against the assets held by a business. The two sides represent different versions of the same thing. The left side of the equation, assets, consists of the "resources" (properties) held by the business; the right side of the equation, equities (creditor's claim and owner's claim against the assets) consist of the "source".
Resources = Sources
Assets = Claims against assets
It should be remembered that the two sides of the equation are always equal because these two sides are merely two views of the same business resources.
Shuja Zia Profile
Shuja Zia answered
Hi there,Well accounting equation is an accounting term where a relation between assets, liabilities and equity is drawn and these are the main components of accounts as well.In accounting equation we say for every debit there is a credit means for every entry we look at two aspects.Means single entry but it has impact on two of the components of accounting equation.

The equation is as follows.Assets = liabilities + equity.Now here if we look at any business it raises capital by two means either by investing himself or by taking some loan from some bank or another company.If a company takes some loan from a bank then this will also help in building up assets. These assets would be of same amount which the company would borrow and here we can easily understand that liabilities are equal to assets over here.

Similarly if owner invests or injects his capital in the business totally then the assets created would be again equal to the equity side.But normally businesses generate capital from owner capital as well as from loans and both collectively make up the same amount of assets which also explain the accounting equation.

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