The Accounting Equation

In: Business and Management

Submitted By raydriv3
Words 429
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Information was defined as data presented in a form that is useful for a specific purpose. Now, we examine how financial data is transformed into financial information and reported on three very important financial statements—the balance sheet, income statement, and statement of cash flows. We begin by describing why the fundamental accounting equation is the basis for a firm’s balance sheet. the accounting equation The accounting equation is a simple statement that forms the basis for the accounting process. This equation shows the relationship between a firm’s assets, liabilities, and owners’ equity. ● ● ● ● ● ● Assets are the resources a business owns—cash, inventory, equipment, and real estate. Liabilities are the firm’s debts—borrowed money it owes to others that must be repaid. Owners’ equity is the difference between total assets and total liabilities—what would be left for the owners if the firm’s assets were sold and the money used to pay off its liabilities. The relationship between assets, liabilities, and owners’ equity is shown by the following accounting equation: Assets = Liabilities + Owners’ equity The dollar total of all of a firm’s assets cannot equal more than the total funds obtained by borrowing money (liabilities) and the investment of the owner(s). Whether a business is a small corner grocery store or a giant corporation such as General Mills, its assets must equal the sum of its liabilities and owners’ equity. To use this equation, a firm’s accountants must record raw data—that is, the firm’s day-to-day financial transactions—using the double-entry system of bookkeeping. The double-entry bookkeeping system is a system in which…...

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