The Accounting Equation

                           The Accounting Equation

 The basics elements of accounting are assets, liabilities and owner's equity. The assets represent the thing of value that a business owns. The liabilities are the claims of the creditors against those assets. The owner equity is the climate of the owner against those assets. The equality between the assets and the liabilities and the owners equity expressed by "accounting equation"

The two sides of the accounting equation must always be equal because the right side to all aseets of the business are owned by someone. The creditors have claims about against the assets of a business until the liabilities have been paid. The owner has a claim against the remaining assets of the business. If no liabilities exists, then the owners equity will equal to the total asset.

Effect Of Business Transaction Upon The Accounting Equation

 

Recall the every buiness transaction brings about a double change in the financial position of the business.The financail position of the business is represented by the accounting equation.

Assets = Liabilities + Owner's equity

Regardless of weather a business grows or contracts this equality between the assets and the claims against the assets is always maintained. Any increase in the amount of total assets is necessarily accompained by an equal increase on the other side of equation, that is, by an increase in either the liabilities or the owner's equity .Any expense incurred will decrease the owner's equity on one side and decrease cash on the other side of  the equation.Any revenue earned will increase the owner's equity on one side and increase assets on the other side.