ACC 240 Briefly Describe Each Element Of The Accounting Equation

ACC 240 Briefly Describe Each Element Of The Accounting Equation

Not all events that occur in a business on a daily basis constitute financial transactions that are recorded. Give an example of a business transaction that would not be recorded and explain why it would not need to be recorded.

ACC 240 Topic 3 DQ 2

Briefly describe each element of the accounting equation. Explain why it is necessary for the equation to remain in balance.

What Is the Accounting Equation?
The accounting equation states that a company’s total assets are equal to the sum of its liabilities and its shareholders’ equity.

This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry (or coverage) on the credit side.

The accounting equation is also called the basic accounting equation or the balance sheet equation.

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KEY TAKEAWAYS
The accounting equation is considered to be the foundation of the double-entry accounting system.
The accounting equation shows on a company’s balance that a company’s total assets are equal to the sum of the company’s liabilities and shareholders’ equity.
Assets represent the valuable resources controlled by the company. The liabilities represent their obligations.
Both liabilities and shareholders’ equity represent how the assets of a company are financed.
Financing through debt shows as a liability, while financing through issuing equity shares appears in shareholders’ equity.
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Accounting Equation

Understanding the Accounting Equation
The financial position of any business, large or small, is based on two key components of the balance sheet: assets and liabilities. Owners’ equity, or shareholders’ equity, is the third section of the balance sheet.

The accounting equation is a representation of how these three important components are associated with each other.

Assets represent the valuable resources controlled by the company, while liabilities represent its obligations. Both liabilities and shareholders’ equity represent how the assets of a company are financed. If it’s financed through debt, it’ll show as a liability, but if it’s financed through issuing equity shares to investors, it’ll show in shareholders’ equity.

The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts. Below are examples of items listed on the balance sheet.

Assets
Assets include cash and cash equivalents or liquid assets, which may include Treasury bills and certificates of deposit.

Accounts receivables list the amounts of money owed to the company by its customers for the sale of its products. Inventory is also considered an asset.

The major and often largest value asset of most companies be that company’s machinery, buildings, and property. These are fixed assets that are usually held for many years.

Liabilities
Liabilities are debts that a company owes and costs that it needs to pay in order to keep the company running.

Debt is a liability, whether it is a long-term loan or a bill that is due to be paid.

Costs include rent, taxes, utilities, salaries, wages, and dividends payable.

Shareholders’ Equity
The shareholders’ equity number is a company’s total assets minus its total liabilities.

It can be defined as the total number of dollars that a company would have left if it liquidated all of its assets and paid off all of its liabilities. This would then be distributed to the shareholders.

Retained earnings are part of shareholders’ equity. This number is the sum of total earnings that were not paid to shareholders as dividends.

Think of retained earnings as savings, since it represents the total profits that have been saved and put aside (or “retained”) for future use.

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