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Accounting Equations and Methods

1. Discuss the expansion of the basic accounting equation to include revenues and expenses. Discuss and illustrate how this expanded accounting equation stays in balance after every transaction and whether the rigorous rules of accounting necessarily mean there is only one numerical answer. Explain.

2. Describe the accounting issues and methods for one Cash, Inventory, and Accounts Receivable, how inventory costing assumptions influence the resulting accounting numbers.

Solution Preview

1. The basic formula: A = L + OE where
OE = opening equity + (current year revenue - current year expense)
The formula supports the requirement for double entry bookkeeping.

The only reason to have a section for revenue and expense is to disclose the results of operations for a given period of time (12 months or less). If there was no income statement, results of operations would be posted directly to balance sheet accounts. Owners' equity would be the culmination of all the years a company had been in business, and a reader of the balance sheet would not be able to ...

Solution Summary

The solution explains how the basic self-balancing formula works in accounting and then applies that formula to a little example for further understanding. For part 2 of the question, there are several paragraphs of narrative for explanation.