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basic accounting equation

The Basic Accounting Equation

The accounting equation is the mainstay of accounting, and this is based on a double-entry registration system, which is the same as any charge corresponding to credit, and we can define it as the equality that exists between the elements that make it up, which are:

Assets = Liabilities + Capital

Therefore, the accounting equation is applied at all times from the beginning of the companys operations, in the same way when it carries out different types of commercial transactions, understanding by transaction the fact or condition that requires a book-entry or accounting record. The equation is called the relation of equality that exists between two members, and only verifiable for certain values of letters that are included in it.

Example: 8x + 15 = 31

This equation only checks for the value of x = 2

At the same time, we will indicate that every equation is made up of two parts, the first on the left known as the first member, and the other on the right known as the second member.

What Are The Rules Of Double-Entry?

According to our experts of assignment writing service in Australia, the fundamental principles on which the Double-entry is based are the following:

  • There is no debtor without a creditor and no creditor without a debtor;
  • He who receives is a debtor and he who delivers is a creditor.
  • Everything that exists is debited and what is provided is credited;
  • The total of the Debt (debits) must be equal to the total of the Credit (credits);
  • Items of the same nature are recorded in the accounts.
  • All concept that is debited by an account must be credited by the same account or vice versa;
  • Losses are debited and gains are credited;
  • The accounts that represent: an increase in Assets, a decrease in Liabilities, and a decrease in Equity (Losses);
  • The accounts that represent: a decrease in Assets, an increase in Liabilities, and an increase in Equity (Earnings) are credited.

Basic Elements of the Accounting Equation

To have a clearer concept and to demonstrate numerically the relationship of financial equality in the balanced equation, we must know the components of this equation.

As mentioned above, the elements that make up this fundamental equation are Assets, Liabilities, and Capital.

1st Element of the Accounting Equation: Assets

We know by asset: the set of goods, rights, or values that an entity owns, said goods have an economic value expressed in monetary terms and is classified as:

Current Assets:

  • Cash or cash.
  • Banks
  • Inventories or Merchandise

Movable and immovable property, machinery and equipment, all of these used for the normal development of its activities, we also know it as:

Non-current assets:

  • Documents receivable
  • Machinery
  • Furniture and office equipment.
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We also have immaterial or intangible assets such as patents, inventions, etc. That contributes to the development of company activities.

The 2nd element of the accounting equation: Liabilities To 3rd Parties

A Liability is a present obligation of the company that comes from past events, the settlement of which is expected to produce an economic benefit. We also know it as the set of debts and obligations to third parties pending payment on a certain date.

The 3rd element of the accounting equation: Capital

Capital represents the investment made by the owner or partners that make up the company, it is reflected through the net result obtained from operations that increase or decrease the initial capital and represents at all times the difference between assets and liabilities.

Accounting Equation Assignment Sample Online

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