Accounting Equation Essay

The write up equation is a formula that represents the descent between the assets, liabilities, and proprietors uprightness of a small business. argumentes use this to fundamentally show what it owns what it owes and what its investors atomic number 18 investing. In assure to understand these concepts it is important to have somewhat knowledge of what is meant by each of the tercet basic comp cardinalnts mentioned. Assets refer to the worth of goods or products in the possession of the owner. Liabilities represent the pith of cash or resources that were borrowed in tramp to acquire the assets.Net worth is the fiscal worth of the individual, less any groovy debts to outface entities. (M. Tatum 2013). These things are important be obtain this is what makes a business of any size thrive. Business need to know these things so that it whitethorn make decisions about its next to witness whether or non it has the potential to be successful and prosper in the future or if they should take an alternate travel guidebook to better their business practice. The balance pall plays a role in the be equation by giving a brief picture of the communitys financial state at a point in time.The balance rag week allow represent the method of accounting equation for a gild Assets = Liabilities + Owners Equity say to a greater extent simply, the long horse resume of the assets equals 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 augment of $1,000 to its assets since the owner decided to invest more money into his business. This append 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 comfortably (QuickMBA, 2007). It is important to realize, though, that a transaction stool affect sole(prenominal) one side of the accounting equation. For instance, if a company chooses to obtain office supplies for $400 using cash, this will not affect the businesss liabilities or equity. Instead, it just 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 shipment of a smart product for $1,000. This causes an automatic increase of $1,000 to history (an asset). However, instead 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 cause three changes to the accounting equation (Money Instructor, 2005).