The Accounting Equation

As an entrepreneur, who are thinking of going into business, or who is already conducting business, you have to start learning about the basic concepts of Accounting because they are the concepts that are used in reporting your business activities to the government come tax time. It is time you must know about one of the most fundamental concepts in accounting.
Accountants process data into documents called financial statements. It is the accounting equation that is the basis for the entire accounting system.
So what is this magical equation?
The Accounting Equation is:
ASSETS = LIABILITIES + OWNERS EQUITY.
In crude definition,
ASSETS are economic resources of the business that are expected to bring benefits for the business in the future.
LIABILITIES are economic resources borrowed by the business from another person or an organization.
OWNERS EQUITY is the economic resources that was contributed by the owners of the business to the business.
One way of thinking of this equation is that the left side is what the business has including its money, equipment, building, land, furniture, etc... The right side indicates where these assets had come from. Were they borrowed from parties outside the business, or were they contributed by the people who own the business.
The other version of this equation, that you might bump into is the:
ASSETS - LIABILITIES = OWNERS EQUITY.
In other words, if the business s assets pay off all its liabilities, you are left with a figure that indicates the economic resources that belongs to the business s owner.
It is pretty much the same thing, a concept of transposition in algebra.
If you take a look at a business s BALANCE SHEET - or what is now modernly called as A STATEMENT OF FINANCIAL POSITION - you ll notice that all the items in there are arranged following this accounting equation in either one of its versions.
Of course in a BALANCE SHEET, it is written vertically, instead of horizontally as it is in the equation.
You ll see the items arranged somewhat as:
ASSETS XXX LIABILITIES YYY OWNERS EQUITY ZZZ
Where, XXX = YYY + ZZZ.
So, next time you see a balance sheet aka statement of financial position, take the time to recognize this logic. This article was written for OrangesAndLime.com, to help creative individuals artists, musicians, designers, illustrators and entertainers build their own freelance businesses. - END OF ARTICLE - Please include the paragraph below if you are republishing this article online or in print. About The Author: Marquez Comelab is the author of the book: The Part-Time Currency Trader . It is a guide for working men and women interested in trading currencies in the forex market. It explains everything you need to know to create your own trading methodology; touching on the basics and preparation before expanding onto the topics of market analysis, tools, trading systems, risk management strategies, discipline and psychology. See: http://marquezcomelab.com. His other articles can also be found at http://thefreedomtochoose.com; along with other helpful trading, business, investing and self-improvement articles.



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