Define the accounting equation and the expanded version of the accounting equation. Provide examples of each of the following: assets,liabilities,equity(common stock, dividends, renvenue, expenses too). why is it important to know this?
Define the
why is it important to know this?
In the double-entry bookkeeping system, each transaction has a dual effect ie. debit and credit effect. Thus, at the end when the balance sheet is prepared, the total of assets will be equal to the total of liabilities and equities. Therefore, the accounting equation is the main base of preparing financial statements under double-entry bookkeeping.
In other words, we can say that the main purpose the accounting equation serves is the balance of data presented in the balance sheet. For instance, assets are valuable resources and liabilities are the obligations and thus balance between both of them is the need of an hour.
Accounting Equation:
Assets=Equity+liability
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