Receive Updates By eMail

ThePartTimeInvestor.Com

Emails delivered by
FeedBurner

What's This?

Search

Articles

The Accounting Equation

As an entrepreneur, who are thinking of going into business, or who is already conducting business, it is time you must know about one of the most fundamental concepts in accounting. MAIN ARTICLE

As an entrepreneur, who are thinking of going into business, or who is already conducting business, you have to start learning about the basic concepts of Accounting because they are the concepts that are used in reporting your business activities to the government come tax time. It is time you must know about one of the most fundamental concepts in accounting.

Accountants process data into documents called financial statements. It is the accounting equation that is the basis for the entire accounting system.

So what is this magical equation?

The Accounting Equation is:

ASSETS = LIABILITIES + OWNERS' EQUITY.

In crude definition,

ASSETS are economic resources of the business that are expected to bring benefits for the business in the future.

LIABILITIES are economic resources borrowed by the business from another person or an organization.

OWNERS' EQUITY is the economic resources that was contributed by the owners of the business to the business.

One way of thinking of this equation is that the left side is what the business has including its money, equipment, building, land, furniture, etc... The right side indicates where these assets had come from. Were they borrowed from parties outside the business, or were they contributed by the people who own the business.

The other version of this equation, that you might bump into is the:

ASSETS - LIABILITIES = OWNERS' EQUITY.

In other words, if the business's assets pay off all its liabilities, you are left with a figure that indicates the economic resources that belongs to the business's owner.

It is pretty much the same thing, a concept of transposition in algebra.

If you take a look at a business's BALANCE SHEET - or what is now modernly called as A STATEMENT OF FINANCIAL POSITION - you'll notice that all the items in there are arranged following this accounting equation in either one of its versions.

Of course in a BALANCE SHEET, it is written vertically, instead of horizontally as it is in the equation.

You'll see the items arranged somewhat as:

ASSETS XXX LIABILITIES YYY OWNERS EQUITY ZZZ

Where, XXX = YYY + ZZZ.

So, next time you see a balance sheet aka statement of financial position, take the time to recognize this logic.

- END OF ARTICLE -

Please include the paragraph below if you are republishing this article online or in print.

About The Author:

Marquez Comelab is the author of the book: The Part-Time Currency Trader . It is a guide for men and women interested in trading currencies in the forex market. Discusses analysis, tools, indicators, trading systems, strategies, discipline and psychology.

Post your comments...

    BUY NOW

    The best traders in the world believe that to succeed in trading, you need to have a trading system that suits you.

    Learn how to develop your own trading methodology to trade the foreign exchange market.

    THIS BOOK IS WRITTEN FOR:

    1. Individuals who do not know anything about trading, forex, shares, futures or options;
    2. Individuals who are already trading other markets and other asset types like shares, futures and options;
    3. Individuals who want to start trading the foreign exchange (forex) market;
    4. Individuals who are looking for a business opportunity that can be done at home full-time or part-time;
    5.Intermediate-level traders who are seeking ways to improve their trading methodology;
    6. Advanced traders doing their research and
    7. Those who may just be interested in forex or trading and investing in general.

    THIS BOOK HAS THE FOLLOWING AIMS:

    1. To explain everything you need to know before you start trading
    2. To warn you of the common pitfalls of trading
    3. To accelerate your education
    4. To help you develop your own trading methodology

    REVIEW

    "Your book is extremely well written. I have now read many and it shows all others to be amateur in comparison. It is the inspiration for me entering the profession with confidence after previously coming to the conclusion that Forex is nothing but a gamble."

    - K. MacGregor, NSW, Australia.

    "This book is very usefull for anyone wishing to learn how to trade in the forex market. The suggestions were presented clearly and in a manner that was very understandable. I personally have started using some of the suggestions outlined in the book with some success. "

    -G. Gorton.