ACCOUNTING EQUATION : Right Side and Left Side of the equation are always Equal

In the point of view of Financial Position, the accounting equation underlies the processes used to capture the effect of economic events.

Asse ts

Lia bilitie s

Equity

This equation generally portrays the equality between the economic resources of entities and the claims to these resources. Meaning, the resources of entities are provided by creditors and owners. The properties or resources owned by the organizations are referred to as ASSETS while the claims and rights to the properties are called LIABILITIES and EQUITIES. The ASSET is on the RIGHT side of the equation and the LIABILITY and EQUITY are on the LEFT side of the equation.

While in the standpoint of getting the Results of Operations, Income or Loss accounting equation is then expressed in the following formula:

Net Income or Loss = Revenues Expenses

Combining the Financial Position and Results of Operations, accounting principles state that the Net Income or Loss (or Retained Earnings) is added to the Equity. Hence, the accounting equation may be expanded as follows:

A sse ts

L i a b i l i ti e s

E q u i ty

Asse ts

Lia bilitie s

Equity

Asse ts

Lia bilitie s

Capital

Net Inc om e

Asse ts

Lia bilitie s

Equity= Capital + (Revenues and G ains E x pens es and Los s es )

Asse ts Asse ts

= =

Lia b ilitie s Lia b ilitie s

+ + Capital +

Equ ity Revenues & G ains E x pens es & Los s es

References : Intermediate Accounting by Spiceland, Sepe, Nelson. McGrawhill, 2011

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