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Accounting Equation Essay

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The Accounting Equation
Sevara Smith
ACC/300
February 11, 2013
Rena Ballot

The Accounting Equation
The basic accounting equation is, assets are equal to liabilities plus stockholders equity. The assets in the equation are the resources owned by a company such as cash, inventory, fixed assets, and accounts receivable. The liabilities are the debits and obligations of the business, the amounts owed to creditors. The stockholders’ equity is the claim the owners have to assets. The stockholders’ equity is subdivided with two parts, common stock and retained earnings. The common stock is the money paid for shares by the stockholders. The retained earnings are the amount the company retained in net income.
With the accounting equation every transaction should have a twofold or dual effect to the extent of the same amount. In other words, assets must balance with the claims to assets. For example, if an asset is increased, a decrease has to occur in another asset or an increase in a liability or stockholders ‘equity. This dual process is revealed on the balance sheet.
The balance sheet gives a picture of a company’s finances at a point in time. It gives a summary of the assets, liabilities, and owner’s equity. The balance sheet represents the accounting equation for a company. It displays the assets and claims to assets at a given period of time. The claims of assets are divided into two groups they are claims of creditors (liabilities) and claims of owners (stockholders equity).
As mentioned earlier, the most be a balance, if there is an increase there must be a decrease somewhere else. For example, if a company borrows $10,000 from the bank, the company’s assets will increase by $10,000 and its liabilities will also increase by $10,000. Another example would be if a school decided to purchase Samsung Tablets from ABC Electronics. The

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