What is an accounting equation?
The accounting equation represents the basic equation associated with the double entry accounting. The accounting equation is essentially determined by the formula for representation of a relationship that exists between assets, liabilities and net assets. As the most common of all equations of balance sheets, the accounting equation is also essential for learning how to properly read and use the balance sheet. Assets refer to the value of goods or products in possession of the owner. Liabilities represent the amount of cash or resources that have been borrowed in order to obtain asset. Clean assets are the financial value of an individual, less excellent debts to external entities. The purpose of the accounting equation is to basically have this final component of net assets, or as Jeněks refers to its own capital.
To illustrate the way in which the accounting equation works to determine net assets, let's assume that the investor currently has a net fortune of two thousand dollars without current obligations.The owner decides to get a new asset for a thousand dollars. In order to obtain an asset, the owner decided to use the assets of five hundred dollars already in possession and then borrowed five hundred dollars to complete the purchase. Assuming there is no depreciation with the asset acquired, the owner now has a control of assets worth a total of $ 3,000 (USD). Now, however, it has liabilities of five hundred USD. This will lead to a net fortune of two thousand, five hundred USD. Until the sum of net assets and obligations equal to activations.
Simply put, the accounting equation shows that net assets are determined by taking over the value of current assets and deducting the value of any current obligations. Regarding the use of an accounting equation as an equation of basic balance sheets, this means that the lower line in the balance sheet always displays a net assets of an individual or entity. If it is the final number of net assets and the amount of liabilities with assets, everything is fine. However, if the combination of liabilities and čIst assets do not compensate the total number of assets, there is something wrong in the accounting process and the investigation to detect the origin of imbalance should be immediately.