State the accounting equation. Explain and define all components of the equation and provide examples of each.
You need to state the accounting equation. As part of this, you need to discuss each component of the equation and give appropriate examples, such as accounts or types of accounts found in the equation.
The basic accounting equation is Assets = Liabilities + Owner's Equity. This is also the equation for a Balance Sheet.
To explain how this works, first we should consider the types of accounts existing in accounting and how they fit together.
There are three types of "real" or permanent accounts. These accounts exist on the Balance Sheet, and they are Assets, Liabilities and Owner's Equity.
In addition, there are three types of "nominal" accounts. These types of accounts close at the end of a period and reset to zero to begin the next period (typically a month or a year). The results of these accounts roll into the Owner's Equity portion of the Balance Sheet in an account called Retained Earnings. These types of accounts appear on the Income Statement and are called Revenues (or Sales), Cost of Goods Sold and Expenses.
So, how this fits together is:
Balance Sheet Real Accounts
The solution states the accounting equation components.