The accounting equation also called the balance sheet shows the relationship between Assets, Liabilities abd Equity of a business.
It concur with the principles of double entry book keeping system.
For each transaction, the total debits equal the total credits. The accounting equation formula is Asset = Liabilities + Equity
Let’s take a look at every element of the accounting equation;
Asset
Asset are properties of a business that can last for a long period of time.
These included Non-current and current asset capital asset, tangible and intangible asset.
Non current asset includes land and building, furniture and fittings.
Current Asset include bills receivables, cash at hand, cash at bank, etc Intangible asset includes trademarks, goodwill, patents and copyrights.
In the accounting equation, the amount of asset must be equal to Liabilities plus shareholders or owners equity.
Liabilities
This is the second part of accounting equation.
Obligation owed to individuals and companies are Liabilities. It can be current and long-term liabilities.
Liabilities paid within a year are current liabilities such as bills payables, payrolls, taxes, wages, etc
On the other hand, liabilities owed for over a year are Non-current liabilities or Long-term liabilities. These include notes payable, unearned revenue from the money yet to received or services that you have not delivered.
Equity
This is the 3rd part of the accounting equation. It is equal to business total asset subtracted by total liabilities. The revenue a shareholder can claim after all debt has been paid is the shareholder equity.
It can be fund in the financial position of a company to ascertain if the business is healthy or not.
The simples way to understand the accounting equation is by rearranging the equation
Owners Equity= Total Asset – Total Liabilities
Owners Equity = Invested Capital + Profit/Losses(Retained Earnings)
Total Assets–Total Liabilities = Capital + Retained Earnings
These accounting equations are vital for healthy business and cannot be overlook in business
