The Accounting Equation

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Accounting is founded on the basic equation that states a company’s
Assets

equal their total

Liabilities

plus their total

Owner’s Equity

. This equation is summarized as

ALOE

. This isthe basis of the Balance Sheet.Assets are the company’s furniture, fixtures and equipment, physical property, intellectual property and other resources. These properties include the physical land as well as the equipmentand building improvements on the property.A company’s liabilities are all of the obligations that the company has incurred. Thecompany has to service these liabilities by making payments on them. These payments may takethe form of cash income or may be sourced from loaned monies. If they borrow money, this is anadditional liability. Liability is “money owed; debts or pecuniary obligations” (Dictionary.com,2009). Liabilities offset assets in the equation that is the Balance Sheet.Owner’s Equity, also known as owner’s/shareholder’s equity, is the final variable in theequation. When liabilities are subtracted from assets, the remaining balance is the owner’s equity.The term owner’s equity is used for privately owned companies. If the business is an incorporatedentity which issued common stock in exchange for a percentage of company ownership, then theowner’s equity is termed owner’s/shareholder’s equity. Cash, stocks and retained earnings are allowner’s/shareholder’s equity.

E1-1

Urlacher Company provides the following accounting service tasks each year.
Communication

– Analysis and interpretation of financial data.

Communication

– Interpretation of meaning, uses and limits of financial data.
Communication

– Compiling a summary of financial events.

Communication

– Accounting report preparation.

Recording

- Maintaining a linear, chronological record of financial data.
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