Accounting Equation Paper
The accounting equation is the basis of double entry accounting. The equation places debits and credits on each side of the equation with a balance on each side being required. The debits are accounted for as assets, while the credits fall under liabilities and shareholder equity. (Kimmel, Weygandt, and Kieso, 2011) The equation looks like:
Assets = Liabilities + Shareholder Equity.
A system of journal entries that show a debit and credit for each entry is used to enter the information. At the end of the accounting period, a ledger is generated that shows all of the credits and debits for each area that is accounted for. Some examples that can be used are Cash, Service Revenue, Expenses, and Unearned Revenue. The journal and ledger are then used to generate several financial statements. . (Kimmel, Weygandt, and Kieso, 2011) The first of these financial statements is the income statement. The income statement is used to provide a summary of the revenue earned verses the expenses incurred for a company. . (Kimmel, Weygandt, and Kieso, 2011) This is an indication of how successful the company operated during a set period of time. This statement is used by stakeholders and investors to help determine how well a company is performing. Another financial statement that is used is the retained earnings statement. This statement shows the amount of money that is retained by the company and the amount that is returned to the shareholders in the form of dividends. . (Kimmel, Weygandt, and Kieso, 2011) This amount can vary from period to period based upon the companies need for capital for growth or expansion. The third financial statement is the balance sheet. Here the assets of the company are compared to the liabilities and shareholder equities to ensure that everything is balanced. . (Kimmel, Weygandt, and Kieso, 2011) This statement can be used by investors and creditors to determine if a company can...
Please join StudyMode to read the full document