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Accounting Equation
ACC/300
Lindsay Hamner
April 3, 2015
Arnold Gilbo

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Proper financial reporting is probably the most important part in the running of any business.
Without it, the business would fail. When working with finances, the accounting equation is an integral
part of any financial statement. It provides proper financial information by gathering appropriate numbers
that explain a companys assets. In addition to the accounting equation, a balance sheet portrays the
financial situation of a company at any given point. The accounting equation has three parts and is
calculated by using the following equation: Assets = Liabilities + Owners Equity.
The first part of the accounting, assets, refer to the resources that the business owns. Some
examples of assets are accounts receivable, machinery, equipment, land and buildings, inventory, cash,
bank and prepaid insurance. The value of the assets of a company are calculating the sum of the
companys liabilities and owners equity.
Liabilities are defined as a companys legal debts or obligations that arise during the course of
business operations. Recorded on the balance sheet, liabilities include loans, accounts payable,
mortgages, rent, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's
operations because they are used to finance operations and pay for large expansions. They can also make
transactions between businesses more efficient. For example, the outstanding money that a company owes
to its suppliers would be considered a liability.

Owners or stockholders equity, sometimes known as capital, refers to amount left after
subtracting liabilities from assets. It usually denotes the amount of investment plus the cumulative net
profit of the business that has not been withdrawn by the owner or distributed to the stockholders in the
case of corporations. On a balance sheet, equity is listed as the amount of the funds contributed by the
owners (stockholders) plus the retained earnings or losses.
Heres an example that shows how the components of the accounting equation affect each other and how
transactions affect the accounting equation:
Accounting Equation: Assets = Owners Equity + Liabilities, which translates to $0 = $0 + $0. When the
owner deposits $ 2,000 in the companys checking account, the accounting equation, under the double
entry accounting system, is expressed as follows $ 2,000 = $2,000 + $0. The business may opt to buy
office equipment using cash amounting to $ 500. The accounting equation will then change to $2000 =
$1,500 + $500, this is because expenses reduce owners capital. This implies that the asset account of
office equipment increased by $500 whereas the cash account decreased by $500.

References

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Investopedia Definitions- Retrieved from http://www.investopedia.com

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business
decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.