Describe the Accounting Equation in Detail
Although Pepsi and local dairy shops may have different products or services, they have one thing in common: the accounting equation.
It is the foundation of double-entry bookkeeping used for most businesses, regardless of size and structure. This method guarantees that the balance sheet statement always equals it at the end. People in the accounting field often need assistance from accounting assignment help to understand all the concepts. If you are also one of them, go through this blog post, where we will study many things related to the accounting equation.
Explain the meaning of the Accounting Equation
The finance of every business has two essential elements:
What it owes & what it owns.
Assets are like what the business owns, and the share of these assets is the owner’s equity, like personal investment, drawings or even liabilities. Here is a perfect formula to describe it better.
Assets = Equity + Liabilities.
The accounting equation is the same for all businesses and provides the basis for calculating all financial statements and financial ratios. So we already understand its meaning, and now we will talk about the elements used in the accounting equation formula. Seek accounting homework help to understand this concept in a much better way.
What three elements are used in the Accounting equation formula?
Here are the three elements used in the formula of the accounting equation:
They represent your organization’s capacity to give products & services. Or it is anything of value that is utilized during the tasks like manufacturing & sales.
Assets are divided into two primary groups: short-term and long-term. For greater understanding, get help from the top accounting assignment help.
The projected lifespan of short-term investments is one year. They consist of the following:
- Cash and its substitutes.
- Inventory Receivable accounts.
- Prepaid costs.
- Long-term assets can be used for more than a year. They can be physical (material) or abstract.
Land, buildings, and equipment are examples of tangible assets, and those that are intangible include copyrights, patents, and trademarks. For more information, seek help from the top accounting homework help in Canada.
Assets that the creditors give are called liabilities. Creditors are individuals or organizations that the business owes money. It can be government, workers, banks & others.
Like assets, liabilities are categorized according to short- or long-term time frames.
Current or short-term liabilities include employee payroll expenses, invoicing, electricity bills, and supplier costs. Mortgages, loans, and deferred taxes are all considered long-term obligations. Ask for the top accounting assignment help in Canada to understand the details.
3. Equity of the owner
The value of the owner’s assets makes up the owner’s equity (s). More specifically, the sum remains after liabilities and support have been settled.
Let’s investigate what drives changes in the owner’s equity.
Owner’s equity increases primarily as a result of revenue growth and investments made by the owner. Investments are sums of money that a business owner directly invests into it, and the owner’s capital category is where these investments are listed.
At the same time, revenues reflect the money made from business operations, including sales, fees, property rentals, cash loans, commissions, and more. Ask experts from top Accounting assignments help to understand it better.
Decrease in the owner equity: This decrease happens due to the drawings and expenses. They are the Cash the owner draws from the business accounts; on the other hand, in costs, we generally talk about the money which comes from the assets already consumed. E.g., Expenses like wages, taxes and equipment etc. Now we will discuss its extended version.
Extended Version of the Accounting Equation
It also has an extended version which is described below:
Assets = Liabilities + Capital of the owner – Drawings of the owner + Revenues – Expenses.
This formula will give you an overall view of the relationship between the main accounts. For other information, get the best accounting assignment help.
1. Equity Owners = Assets minus Liabilities
You probably don’t notice a significant deviation from the fundamental accounting equation, and the equation has a different interpretation if the owner’s equity is moved to the left.
It informs us that when it comes to meeting their demands, creditors take precedence over owners. At the same time, the primary objective of the fundamental accounting equation is to display the company’s financial situation.
2/. Net worth: Assets minus liabilities
This can be another accounting equation that can come across. Equity, as well as net worth, can be synonymous with each other. We also call the equities by names like stockholders, net assets etc. Get accounting homework help to understand it better. Now let’s know its example.
To understand the accounting equation, let’s know some practical examples.
- The business owner invests $10000 in the ABC company, and this transaction will also increase the money in both Capital of the owner’s equity & Cash assets. The whole equation will look like this:
- ABC receives 800 dollars in Cash from the services it provides to the customer. In this case, the amount has increased in two accounts by $800. These are the revenues & Cash. The whole accounting equation will be like this:
For a more excellent example, take help from the top accounting assignment help. So I already understand the concept of account equation in detail. With advantages, it also has some disadvantages, and let’s know all of these.
Critical Limitations of the Accounting Concept
The accounting equation has its restrictions, notwithstanding how useful it is for performing accounting for your organization.
First, it doesn’t analyse how the business performs to investors or other interested parties.
Additionally, it only partially guards against accounting mistakes, and there is a chance of inaccuracy that does not involve the accounting equation even when the balance sheet balances itself.
We suggest reading Common Accounting Errors – A Practical Guide with Examples to learn more about accounting errors and how to recognize them. For more information, get the best accounting homework help.
Finally, if the professor gives you homework on such a topic, take some external guidance. Otherwise, you will not get good grades in your lesson. Due to the many steps involved, you can easily forget some important ones, which can lead to the deduction of grades.
It can also lead to significant errors in the equation. You do not want this because it can affect your overall grades. As a student, you already understand the importance of steps in the university education system.
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