All our business finances are managed easily in today’s world because we have certain rules, methods that simplify this sector of business. Basic Accounting principles are the process to guide you to recording, summarising, analyzing, and reporting financial transactions of a business. Maintaining a proper record of help in growing a successful business. By having a look at these records we can see the company’s operations, financial position, cash flow, etc. To maintain all this information there are certain specific equations. Accounting equations are the reason that accounting is possible. The accounting equation is the base of the double-entry accounting system. It is a system where each transaction is entered into two places: a debit and a credit side. This system of accounting is very trustworthy as the error can easily be identified in this. So the accounting equation is:
Assets = Liabilities + Owner’s equity (shareholder’s equity)
Assets are any use or a valuable thing which is beneficial for the business. Assets are everything the business owns. This is mainly of two types: tangible and intangible assets. Tangible assets include things such as cash receivables, inventory, car, real estate, machinery, etc. Intangible assets include patents, copyrights, trademarks, and other intellectual property.
Liability is something that company owes. This includes things like loan payments, lease payments, other payables. This is also of two types: short term and long term. The long term is the one which is more than 12 months.
Owners equity or shareholders equity refers to how much of a business belongs to the owners(shareholders). It can also be described as assets minus liability.
The accounting equation is very essential in a double-entry accounting system. In this, the debit and credit side of a transaction is always balanced equally. If it’s not happening, something’s wrong. By using this equation you can ensure that debit and credit are recorded accurately. The transaction needs to be recorded correctly because it is the base of every other thing in accounting. The accounting equation is the most important principle of accounting.