Accounting Equation

The Accounting Equation

Dawn Eichten

ACC 300

April 19, 2013

Instructor: Rena Ballot

The accounting equation is a major part of a financial statement. It gives, at all times, proper information because it gathers the appropriate numbers that explain a company’s assets. A balance sheet portrays the financial situation of a company at any given point.

The accounting equation is known as: Assets=Liabilities + Owner’s Equity. Within this equation assets are those items of property that the company may own. The debts that are currently owed to lenders are considered liabilities. An owner’s equity, also known as shareholders’ equity, is considered the ownership interest in assets once debts are repaid.

When pertaining to a balance sheet, the assets portion of the accounting equation are those of what is on hand meaning cash and cash equivalent. These items are quickly produced when in need such as checking, savings account balances, or those investments that are mature and payable within three months. Inventory or those goods kept on hand, accounts receivable or amounts owed the company by customers, or equipment, property, or plants that are saleable are also included in this category. Current assets are those that are expected to convert to cash within 12 months or less. Those assets that are not current assets are called non-current assets by default.

Liabilities are those amounts due from customers for product or services rendered. Notes payable are contract obligations to lenders and also falls into this category.

An owner’s equity is made up of common stock and retained earnings. Common stock consists of those amounts invested by owners within a company. Retained earnings are the result of all net income over the lifetime of the business but has not been distributed to owners in form of a dividend.

A balance sheet provides all types of assets, liabilities, and owner equity to be listed separately. It is then totaled by category before tallying the...