Accounting Equation Essay

The accounting par is a formula that represents the relationship among the summations, liabilities, and owners equity of a small business. Businesses use this to fundamentally show what it owns what it owes and what its investors are investing. In order to understand these concepts it is all-important(prenominal) to take some sockledge of what is meant by each of the three basic components mentioned. Assets diagnose to the worth of goods or products in the possession of the owner. Liabilities represent the amount of immediate payment or resources that were borrowed in order to acquire the assets.Net worth is the fiscal worth of the individual, less any outstanding debts to outside entities. (M. Tatum 2013). These things are important because this is what makes a business of any size thrive. Business need to know these things so that it may make decisions about its emerging to determine whether or not it has the potential to be successful and prosper in the future or if they should take an alternate route to better their business practice. The sense of equilibrium Sheet plays a role in the accounting equation by giving a brief picture of the familys pecuniary state at a point in time.The balance bumvass will represent the accounting equation for a company Assets = Liabilities + Owners blondness stated more simply, the dollar total of the assets represents the dollar total of the liabilities plus the dollar total of the owners equity. The balance sheet presents a companys resources, what they have what they owe and what is invested in them. For example, say a company has an subjoin of $1,000 to its assets since the owner decided to invest more money into his business. This increase to assets represents an equal increase to the amount of money the company owes to the owner (equity).Thus, the accounting equation will not remain in balance unless $1,000 is added to the companys equity as well (QuickMBA, 2007). It is important to realize, though, th at a transaction can call for only one side of the accounting equation. For instance, if a company chooses to purchase office supplies for $400 using money, this will not affect the businesss liabilities or equity. Instead, it only represents the exchange of one asset for another (cash is decreased by $400, while office supplies increase by $400).Finally, a transaction can cause more than two affects on the accounting equation. For example, say a retailer decides to buy a despatch of a new product for $1,000. This causes an automatic increase of $1,000 to inventory (an asset). However, kind of of paying for this shipment with only cash, the company decides to pay $500 up front and purchase the rest on credit. As a result, cash is only decreased by $500 and liabilities are increased by $500, thus causing three changes to the accounting equation (Money Instructor, 2005).