This essay Accounting Equation Paper has a total of 439 words and 4 pages.
Accounting Equation Paper
April 13, 2015
Accounting Equation Paper
The accounting equation is displayed as, assets = liabilities + stockholder’s equity. This simple equation, that can actually be rather complex at times, is the basis for what is known as the double-entry accounting system (Investopedia, 2015). The double-entry accounting system is also used to create and maintain an organization’s balance sheet. According to Investopedia (2015), “The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity” (Accounting Equation). With this paper, I will examine the components of the accounting equation and balance sheet, and provide examples of this equation.
As previously stated the accounting equations is comprised of assets, liabilities, and stockholder’s equity. Assets are resources that have a value to an organization such as; cash, accounts receivable, inventory, equipment, etc. (Accounting Coach, 2015, What are Assets). Liabilities are financial responsibilities of an organization such as; accounts payable, wages, interest, taxes, etc. (Accounting Coach, 2015, Balance Sheet). Stockholders’ equity is defined as the owners claim to assets (Kimmel, Weygandt, & Kieso, 2011, Chapter 1). The three components of the accounting equation are also the three key component of the balance sheet. As mentioned above, the accounting equation and balance are intertwined and rely on the double-entry accounting system. The double-entry accounting system, according to Investopedia (2015), “Is based on the fact that every financial transaction has equal and opposite effects in at least two different accounts” (Double Entry).
When an organization begins, it starts with the standard accounting equation of assets = liabilities + equity. The initial equation with number listed will be $0 = $0 + $0. When the owners of the organization input their money, let say $1000, the equation will look like this: $1000 = $0 + $1000. Now let say that the organization decided to do $500 worth of advertising, the equation would now change to the following: $1000 = $500 + $500. Finally, let say that the organization makes its first sale worth $300 because of the advertising, the equation would now change to: $1300 = $500 + $800.
Accounting Coach. (2015). Balance Sheet. Retrieved from
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Investopedia. (2015). Accounting Equation. Retrieved from
Investopedia. (2015). Double Entry. Retrieved from
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2011). Financial Accounting Tools for Business
Decision Making (6th ed.). Retrieved from The University of Phoenix eBook.
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