Are you thinking of going into business for yourself, or do you already own your own business? If this is you, then you must know about the most fundamental concepts in accounting.
Accountants process data into documents known as financial statements. This is the accounting equation that is the basis for the complete accounting system. So what is the equation?
ASSETS = LIABILITES + OWNERS’ EQUITY.
What does this actually mean?
ASSETS are “he economic resources of the business that are expected to bring benefits for the business in the future.”
LIABILITIES are “the economic resources borrowed by the business from another person or an organization.”
OWNERS’ EQUITY are “the economic resources that was contributed by the owners of the business to the business.”
To better explain this equation, the left side (ASSETS) are what the business has which includes money, inventory, equipment, buildings, furniture, etc. The right side (LIABILITES + OWNERS’ EQUITY) is where these assets came from. Were they contributed by the by owners of the business or were they borrowed by other parties outside the business.
You may also see this equation take another form:
ASSETS – LIABILITIES = OWNERS’ EQUITY
This is better translated as, if the business’s ‘assets’ pays off all of its ‘liabilities’ it equals the amount of economic resources that belong to the business’s owners.
This formula is translated into a horizontal equation presented on a Balance Sheet (also known as Statement of Financial Position) and used to represent a snapshot at a single point in time of the business’s financial position.
And you that you would never use algebra! Just keep this formula in mind the next time you review your balance sheet.