Accounting Principles- Understanding the nature of The Accounting Equation.

Mbeu By Mbeu, 23rd Aug 2013 | Follow this author | RSS Feed
Posted in Wikinut>Business>Accounting & Finance

The Accounting Equation is the basis of proper record keeping in any business that seeks to report to its owner and stakeholder correctly. It is the essential part of the whole understanding of the functioning of the Accounting discipline.

How Assets equal Capital and Liabilities.

If you are in school and studying this subject, you may know already that Assets are equals to Capital plus Liabilities. Change those terms around, apply the laws of solving equations, you have a balance at all times on both sides of the equals sign.

For a business person, this may seem a bit technical and wordy, perhaps too involving rather tedious calculations and requiring more attention. Well, if you think that way, you are right! Accounting, is that area where one needs to watch over, if in business, and if a businessman is too busy, the best alternative is to employ the services of an accountant. I bet many have been told to keep all the records of their purchases and sales for accounting purposes. I am going to discuss the purpose right here, right now.

Perhaps I am the only one who is excited about the growth of my business. I watch it live daily because every business is an entity that exists in its own right. That entity needs life, the life similar to the one God breathed into Abraham the day He created our ancestor. Business owners do the same when they put money into a business, turning an idea into reality is like giving life to it. It begins to thrive the moment a person makes an investment into it. Automatically, that investment goes on to become Capital and at the same time the business' Asset. Imagine this, a man wants to open a Taxi Cab business. He has a vehicle that he wants to use for this business. He decides on a certain day to start, so he gives the entity the vehicle to use in its operations. Once the car is in the business, it is owned by the business and thus, it becomes the business' Capital, that is, the item that was used to kickstart operations. On the same token, the item is going to stay in the business and owned by the business, it becomes the business' Asset. At this point, we have an equation that looks like this:
CAPITAL= ASSET.

If however, the man went on to buy the car on credit from Motor Seller (just an example), there is a Liability that is incurred and consequently, the equation now looks like this:
ASSET= CAPITAL +LIABILITY.

Now, everything that follows in the business' operation, has to at the end be incorporated into the final accounts that are basically this equation. Every transaction has to be recorded so as to capture all data and be able to minimize losses that many employers suffer due to lack of scrutiny of their finances. I will explain more in my next article and meanwhile, enjoy this!

Tags

Accounting, Assets, Business, Business Ownership, Business Startup, Capital, Expenses, Income, Liabilities, Profit, Purchases, Sales, Transactions

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author avatar Mbeu
Word, or words make up and unmake things in life. Everything we see and don't see.

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