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Finding the Accounting Equation

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What is the accounting equation? what are all the components of the equations and can you please include examples?

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Solution Summary

The solution examines the components of the accounting equation. What you can include in examples is given.

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Accounting equation

There exists a very close relationship between assets, liabilities and net worth. The formula that establishes this relationship between assets, liabilities and net worth is commonly referred to as the Accounting equation. This equation can be referred to as the basic foundation of the double-entry system of accounting. It is a statement of equality between assets and liabilities. The accounting equation reads:
Assets = Liabilities + Owners' equity

The fundamental accounting equation is the back bone of the accounting and reporting system. It is central to understanding a key financial statement known as Balance Sheet. Basically it shows that all the assets are either financed by borrowings / liabilities or are contributed by the owners of the business / shareholders. This equation remains in balance for each transaction and holds at all times over the life of the business. Any accounting transaction has an equal effect on both sides of the equation or offsetting effect on the same side of the equation. The basic purpose of the equation is to arrive at the final component of equity or net worth. It is therefore also ...

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