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Accounting Equation

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Individual Assignment - Accounting Equation Paper
Dennis R Ware
ACC/300
October 1, 2012
Kimberly McMillon

Individual Assignment - Accounting Equation Paper

From the largest corporation all the way down to the mom and pop store, every business transaction will have an effect on a company’s financial position. According to Investopedia.com, the financial position of a company is measured by the following three things: assets, liabilities, and owner’s equity. The assets are what the company owns. The liabilities are what the company owes to others. The owner’ equity is the difference between the assets and liabilities.
The accounting equation offers a simple way to understand how the three amounts relate to each other. The accounting equation for a sole proprietorship is as follows: Assets = Liabilities + Equity. The accounting equation for a corporation is as follows: Assets = Liabilities + Stockholders’ Equity. Examples of assets include cash, account receivable, and equipment (Kimmel, 2011). From the accounting equation, you can that the amount of the assets must equal the combined amount of liabilities plus owner’s (or stockholders’) equity. Examples of liabilities include notes payable, accounts payable, and salaries payable (Kimmel, 2001). Examples of owner’s or stockholders’ equity include common stock and retained earnings.
The balance sheet is also known as the statement of financial position. It reflects the accounting equation. The balance sheet reports a company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point of time. Just like the accounting equation, the balance sheet shows that a company’s total amount of assets equals the total amount of liabilities plus owner’s (or stockholders’) equity.
If a company keeps accurate records, the accounting equation will always be in balance. That means that

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