Accounting Equation Explanation

Accounting Equation

Lisa Conley

DB1

Colorado Technical University

January 9, 2013

The accounting equation is written as the assets = liabilities + owners’ equity. The resources that are controlled by a business are considered to be its assets. These assets usually come from two sources, which are the investors who buy into the business and the creditors who give loans to the business. Those who give these assets to the business have legal claims on those assets. Since the total assets of any business are equal to the amount given by investors and assets that are given by creditors, this creates the relationship called the accounting equation.

The business owners’ equity is affected by capitol contributions, such as stock. There will be income which is, revenues minus expenses, and gains minus loses, and maybe additional capital and withdrawals such as dividends. At the end of a period, all these items will impact the business equity. Revenues, gains, contribution will always add to the equity. Expenses, loses, withdrawals will always take away from the businesses equity. When a transaction occurs, the assets may change, but the equation will remain in balance. This equation serves as the basis for any balance sheet.

Assets can be tangible or intangible. The tangible are entities such as land, buildings, vehicles, and inventory. The intangible assets are the accounts receivable, patents, and contracts. Liabilities are the businesses debts, which is the financial obligation of the company. The companies’ working capital is the difference between its current assets and current liabilities.

Equity is the most important thing to a business owner because it is the owner’s share of the company. Equity is also called Net Worth. Income is the money the company earns from selling a product or service. Other names for income are revenue, gross income, and turnover. Net income is revenue less expenses. Income is realized differently based on...