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    Chapter 3. The Accounting Equation

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    Karysse Arielle Noel Jalao
    The accounting equation states that assets always equal liabilities plus owner's equity. It shows the relationships between a business's assets, liabilities, and owner's equity. Assets are resources owned, liabilities are debts owed to creditors, and owner's equity is the owners' claim to or investment in the assets. Any transaction will affect at least one of these three elements. The equation forms the basis of the balance sheet and profit and loss statement and explains that the value of a company's assets will always be equal to the sum of borrowed and own funds.

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    Chapter 3. The Accounting Equation

    Uploaded by

    Karysse Arielle Noel Jalao
    2K views2 pages
    The accounting equation states that assets always equal liabilities plus owner's equity. It shows the relationships between a business's assets, liabilities, and owner's equity. Assets are resources owned, liabilities are debts owed to creditors, and owner's equity is the owners' claim to or investment in the assets. Any transaction will affect at least one of these three elements. The equation forms the basis of the balance sheet and profit and loss statement and explains that the value of a company's assets will always be equal to the sum of borrowed and own funds.

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    Chapter-3

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    The accounting equation states that assets always equal liabilities plus owner's equity. It shows the relationships between a business's assets, liabilities, and owner's equity. Assets are resources owned, liabilities are debts owed to creditors, and owner's equity is the owners' claim to or investment in the assets. Any transaction will affect at least one of these three elements. The equation forms the basis of the balance sheet and profit and loss statement and explains that the value of a company's assets will always be equal to the sum of borrowed and own funds.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    2K views2 pages

    Chapter 3. The Accounting Equation

    Uploaded by

    Karysse Arielle Noel Jalao
    The accounting equation states that assets always equal liabilities plus owner's equity. It shows the relationships between a business's assets, liabilities, and owner's equity. Assets are resources owned, liabilities are debts owed to creditors, and owner's equity is the owners' claim to or investment in the assets. Any transaction will affect at least one of these three elements. The equation forms the basis of the balance sheet and profit and loss statement and explains that the value of a company's assets will always be equal to the sum of borrowed and own funds.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
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    of 2

    CHAPTER 3.

    THE ACCOUNTING EQUATION

    The resources owned by a business are its ASSETS. Examples of assets includes cash, land, buildings,
    and equipment. The rights or claims to the assets are divided into two types: (1) the rights of creditors and
    (2) the rights of owners. The rights of creditors are the debts of the business and are called LIABILITIES.
    The rights of the owners are called OWNER’S EQUITY.

    The following equation shows the relationships among assets, liabilities, and owner’s equity:

    Assets = Liabilities + Owners Equity

    The underlying rationale behind the accounting equation is that of equilibrium. Meaning, every plus should
    have a corresponding minus and every debit should have a corresponding credit. Liabilities usually are shown
    before owner’s equity in the accounting equation because creditors have first rights to the assets.

    The entire concept of the fundamental accounting equation is contained within the below mentioned three
    variables. Namely,

     Assets

     Liabilities &

     Owner’s Equity

    The fundamental accounting equation explains that the value of a company’s assets will always be equal to the
    sum of the borrowed funds and own funds. Also, Given any two variables, the third variable can be easily
    obtained. The fundamental accounting equation also forms the basis of the balance sheet and profit & loss
    account. Any transaction in a business, will without a doubt, impact one of the three variables. Therefore, it is
    important to understand the context of each variable.

    ELEMENTS OF THE FUNDAMENTAL ACCOUNTING EQUATION

     ASSETS - Asset is defined as resource controlled by the entity as a result of past event and from
    which future economic benefit are expected to flow to the entity.

     LIABILITIES - Liability is present obligation of the entity arising from past event the
    settlement of which is expected to result in an outflow from the entity of resources embodying
    economic benefits.

     OWNER’S EQUITY - Equity is the residual interest in the assets of the entity after deducting
    all of the liabilities.

     INCOME - Income is increase in the economic benefit during the accounting period in the form
    of an inflow or increase of asset or decrease of liability that results in increase in equity, other
    than contribution from equity participants.

     EXPENSE - Expense is decrease in economic benefit during the accounting period in the form
    of an outflow or decrease of asset or increase of liability that results in decrease in equity, other
    than distribution to equity participants.
    The table below illustrates the effect of transaction on the accounting equation. The abbreviations in the
    examples shall mean the following:

    INC –increase

    DEC –decrease

    NC –no change

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