The accounting equation is an equation that includes the Assets, Liabilities, and Stock of a company. These three attributes determine the value of a company. This value is used to file the company’s taxes. When the value is figured by the accounting equation, investors can determine a possible return on their investments.
Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the claims of owners on the assets of the business. Stockholders’ equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is: Assets = Liabilities + Stockholders’ Equity (Wiley, Kimmel, Weygandt, & Kieso, 2011).
A balance sheet is used to report the company’s assets, asset claims, and liabilities at a specific point in time. The basic accounting equation is what makes up the balance sheet. Assets are added together to come up with a total cost. Liabilities and stockholder’s equity is also added together. The two sums are then added together to figure out if the business relies on the owners and operators, or if it relies more on the investors. Shown below is an example of a company whose assets outweigh their liabilities.
|Balance Sheet | |Assets | |Cash |$4,600 | |Accounts Receivable |$4,000 | |Supplies |$2,400 | |Equipment |$26,000 | |Total Assets...
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