# Accounting Equation

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There are numerous aspects to the accounting equation and each has its own set of criteria. In order to maintain proper balance of the account equation, assets equaling liabilities plus shareholder’s equity there are several things to consider which include recordable transactions and financial statements.

A transaction is any event that has an impact on the financial statements of the business. In order for a transaction to be recorded it must result in assets equaling liabilities plus shareholder’s equity. Examples of recordable transactions include; the sale of merchandise to a customer, a purchase of supplies or equipment, and borrowing funds from a lender. The aforementioned equation assets = liabilities + shareholder’s equity is the fundamental accounting equation. For an account to have a transaction post to it both sides of the equation must remain equal. You could not for example increase assets without subsequently decreasing liabilities or shareholder’s equity.

There are four primary financial statements in accounting; Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows. A Balance Sheet is a statement that shows all of a business’s assets, liabilities, and equity for a point in time. The function of a balance sheet is to show a company’s liquidity and calculate net worth. An Income Statement is a statement that measures a company’s financial performance over a given period, a year for example. The primary function of the income statement is to show how a business is incurring its revenue and its expenses. A Statement of Retained Earnings is responsible for showing the net income left in a business once dividends or withdrawals have been made. This net income is derived by subtracting the dividends and withdrawals from the beginning balance of retained earnings and adding in any new net income. Lastly, there is...

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