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The accounting equation builds the basics for all accounting system. The double entry accounting system is entirely based on basic accounting equation. And a simple accounting equation reveals two simple facts about a company: what the company owns and what it owes. In this page, we will talk about the accounting equation only.
So, at first understand the fundamental elements of an accounting equation. The company’s financial position is measured in the mention terms:
Assets – It mean what is own by the company and this include cash, inventory, accounts receivable, investments and prepaid insurance
Liabilities – I means what companies owes to others and this includes loans payable, salaries, account payable, interest payable
Capital – This is the difference between the assets and liabilities.
The general accounting equation describes the relationship among the mention elements in the following manner,
How to Solve a Basic Accounting Equation?
The example of solving the equation using the above mentioned formula.
Problem: Check out how accounting equation is satisfied after considering each of the transactions in Mr. a books
Started business with capital $100,000
Solution of the problem
Capital (100,000) + Liabilities (0) = Assets (cash = 100,000)
Bought furniture $25, 000
Capital (100,000) + Liabilities (0) = Assets (Cash = 75,000 + Furniture = 25,000)
Bought goods for cash $20, 000
Capital (100, 000) + Liabilities (0) = Assets (Cash = 55,000 + Furniture = 25,000 + Goods = 20,000)
Brought goods from Mr. Nelson on credit $5,000
Capital (100, 000) + Liabilities (Nelson = 5,000) = Assets (Cash = 55,000 + Furniture = 25,000 + Goods = 25,000)
Sold goods for cash for $15, 000
Capital (100,000) + Liabilities (Nelson = 5,000) = Assets (Cash = 70,000 + Furniture = 25,000 + Goods = 10,000)
Sold goods to Mr. William on credit $8,000
Capital (100,000) + Liabilities (Nelson = 5,000) = Assets (Cash = 70,000 + Furniture = 25,000 + Goods = 2,000 + William = 8,000)
Paid cash to Nelson $4,000
Capital (100,000) + Liabilities (Nelson = 1,000) = Assets (Cash = 66,000 + Furniture = 25,000 + Goods = 2,000 + William = 8,000)
Received cash from William $5,000
Capital (100,000) + Liabilities (Nelson = 1,000) = Assets (Cash = 71,000 + Furniture = 25,000 + Goods = 2,000 + William = 3,000)
This is just an example; students are given more challenging problem when it come financial accounting assignment equations.
Some of Other Accounting Problems Include
- Make an accounting equation for a corporate
- Accounting equation a sole proprietorship company
- Calculating the missing amount within equity of owner.
- Expanded accounting equation for a sole proprietorship firm
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