University of Phoenix
Instructor-Chastity D. Gaither
The equation of accounting is the basic equation that is associated with double-entry accounting. The accounting equation establishes the formula of representing the relationship that is between assets liabilities, and net worth. Furthermore, the most common of all the various balance sheet equations, would the accounting equation and it is also fundamental to learning how to properly read and utilize a balance sheet. The main focus of understanding how accounting equation works is, being able to obtain a meaning of each of the three basic components that is mentioned in the equation. Assets referred by the worth of goods or products in the possession of the owner. A liability represents the amount of cash or resources that are borrowed in order to acquire assets. Net worth is the financial worth of the individual, less any outstanding debts to outside entities. Essentially, the point of the accounting equation is to arrive at this final component of net worth, or sometimes can be referred to, the equity. The Website for Wisegeek (2012) stated, “an example of accounting equation is to determine the net worth, assuming an investor currently has a net worth of two thousand dollars, an no liabilities. The owner chooses to acquire a new asset for the amount of one thousand dollars. So, in order to acquire the asset, the owner chose to use five thousand dollars of assets that are already in his or her possession and then borrow five thousand dollars to make a purchase. Assuming there is no depreciation associated with he acquired asset, the owner now has the control of assets worth a total of three thousand US Dollars. However, he or she now has liabilities equal the assets; all is well in the accounting process.
To break this related topic down clearly, the accounting equation simply illustrates the net worth is determined by taking the value of...