Operations Management

Q no 2

what is accounting equation?describe its importance

A)accounting equation

The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company’s shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. 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. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.

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What Is The Importance Of Accounting Equation?

The accounting equation (asset = liabilities + owners equity)has great importance because it reveals the company's financial standing at a particular time. The financial standing is important to investors who may wish or have purchased stock in the business. Also the financial standing of the organization is important to creditors who wish to loan the business money. The company’s goal is to have resources that have no claims in opposition to them.

Examples of Asset Account:

Cash, Inventory, Equipment

Examples of Liability Account:

Account Payable and Notes Payable

Examples of Owner's Equity Account:

Capital Stock and Retained Payable

Asset (Resources)

Liability(Method of financing resources that require repayment)

Owner's Equity(Method of financing resources that does not require repayment and represent ownership interests in the business)

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