Accounting Equation And Its Relations With The Balance Sheet

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This article explains what is accounting equation and its components and how the accounting equation relates to the Balance Sheet.

• The accounting equation is based on the business entity concept which assumes that the business, as a unit by itself, acquires its own assets through funds supplied by the owner or by external sources.

• The accounting equation =Assets=Owner’s Equity + Liabilities

• Assets are items of value owned by the business

• Liabilities are amounts owed by a business to external parties.

• Owner’s equity is the owner’s interest or claim on the business

• Owner’s Equity=Assets-Liabilities

• Owner’s equity can be increased through investment by the owner or as a result of profit earned from business operations

• Owner’s equity can be decreased through withdrawals by the owner for personal use or as a result of losses made from business operations.

The relationships between the accounting equation and the balance sheet:-

• The Balance Sheet is a statement listing all assets, owners’s equity and liabilities AT A PARTICULAR DATE
• The balance sheet totals WILL ALWAYS BALANCE because the assets will always be equal to owner’s equity plus liabilities

• The accounting equation and the Balance Sheet are two different ways of expressing the same idea.

• The equality of the accounting equation and the balance sheet totals are always maintained no matter what transactions take place in the business