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The Accounting equation is regarded to be the groundwork of the double-entry accounting system. It is displayed on the Balance Sheet of the company, wherein the total assets of the company are equal to the total liabilities and shareholders’ equity of the company.
On the Basis of the double-entry system, the accounting equation makes sure that the balance sheet is balanced, and every entry that was made on the debit category must have a matching entry on the credit category.
The formula for an accounting equation is:
Assets= Liabilities + Owner’s Equity
In a balance sheet, the foundation of the accounting equation can be found, such as:
Let’s consider an accounting equation example here. Suppose, for one Fiscal Year; a leading company has reported the below numbers on the balance sheet:
Now, if you calculate the right side of the equation (equity + liabilities), you will get ($60 billion + 130 billion) = $190 billion, which is equal to the assets’ value that the company reported.
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Jotted down below is the balance sheet of a corporation as of September 30, 2019:
Now the accounting equation is assets = liabilities + shareholders’ equity. This can be calculated as follow:
$268818 + $217942 = $486760
A business’s financial position, irrespective of its size, is evaluated on the basis of two major components of the assets, liabilities, and the balance sheet. Shareholders’ equity is the third section on the balance sheet.
With the help of an accounting equation, the association of these components with each other can be represented. Put simply; assets delineate the essential resources that the company controls. The liabilities showcase the obligations of the company. Lastly, both shareholders’ equity and liabilities show how the company’s assets are financed.