Question

LO3. What is the accounting equation? a) Please write the basic accounting equation: a. List 3 examples of Assets b. List 3 examples of Liabilities. c. In your own words, what is Equity

Answer 1

a) ACCOUNTING EQUATION

ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY

It represents that sum total of all assets of the organization is equal to sum total of both liabilities and shareholders' equity of the organization. This equation summarize the balance sheet of the organization so we can say that actually this accounting equation shows the financial position of the organization.

a. Assets

      Assets are the resources that the organization use to ensure its future revenue. In simple words we can say that all valuable things owned by the entity is called as Assets of that entity.

Assets can be classified as tangible assets and intangible assets

tangible assets : These are those assets which can be physically identifiable

                           Example : Furniture, Cash, Land, Vehicle

Intangible assets : These are those assets which can not be physically identifiable

                           Example : Trademarks, Copyrights, Licenses

b)Liabilities

       The term liabilities represents debts and obligations of the organization.

                         Example : Accounts payable, Bank overdraft, Interest payable , Rent payable .etc

c)Equity

   Equity in simple words we can say that difference between the assets and liabilities of the entity.

                               EQUITY = ASSETS- LIABILITIES

      In other wise states that capital remaining in the organization after set off the liabilities outstanding with assets of that organization. In the event of liquidation of the organization the owner takes these portion of capital personally.

       Examples of Equity : Common stock, Preferred stock, Retained earnings, Capital surplus .etc