Chapter 1, Problem 1.5BE

To determine

Basic Accounting Equation:

The mathematical equation, which shows the relationship among the different categories of a balance sheet, such as assets, liabilities, and stockholders’ equity of a company, is referred to as the “basic accounting equation.” It is represented as below:

$\text{Assets}=\text{Liabilities}+\text{Stockholders' equity}$

Assets

Assets are the resources owned by a business to carry out production and sales activities. The assets are associated with a future economic value that can be expressed in terms of monetary values. All the assets are meant to provide future services or benefits. Examples include cash, accounts receivable, land, buildings, equipment, vehicles, investments, etc.

Liabilities

Liabilities are the obligations against assets that are to be fulfilled in the future. Most of the businesses borrow money or buy goods and services from a supplier on credit. This incurs a future obligation on the businesses, which is to be fulfilled in the future. Examples include loans payable, interest payable, accounts payable, wages payable, etc.

Stockholders’ equity

The amount invested to a business by its shareholder or the donated capital and earnings from operations less any dividends issued gives the stockholders’ equity. The stockholders’ equity gives the ownership claim on the total assets of a business. The amount left after satisfying the creditors, belongs to the stockholders’ claim on the assets. It also includes common stock and retained earnings.

Whether the given items belongs to an asset, liability, or part of stockholders’ equity.