The Accounting Equation

Property: Ownership and Control Property is anything of value that is owned or controlled. When you Own something you have a legal right to it and its financial value/claim When you Control something, you only have the right to use the item

For Example: If you pay $600 cash for a mountain bike, you have both the right to use it and financial claim. (pg 47) However, if you pay later on something, you are buying on credit. The person/business you owe money to is called the creditor. Bike lock example on (pg. 47)

The Accounting Equation From the large corporation down to the corner beauty salon, every business transaction will have an effect on a company’s financial position. The financial position of a company is measured by the following items: Assets (what it owns) Liabilities (what it owes to others) Owner’s Equity (the difference between assets and liabilities)

The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is: Assets = Liabilities + Owner’s Equity

The accounting equation holds at all times over the life of the business. When a transaction occurs, the total assets of the business may change, but the equation will remain in balance

Assets ASSETS: Assets are the economic resources of the entity, and include such items as cash, accounts receivable (amounts owed to a firm by its customers), inventories, land, buildings, equipment, and even intangible assets like patents and other legal rights and claims.  Assets are presumed to entail probable future economic benefits to the owner.

Liabilities LIABILITIES:  Liabilities are amounts owed to others relating to loans, extensions of credit, and other obligations arising in the course of business.

OWNERS' EQUITY:  Owners' equity is the owner's "interest" in the business. It is sometimes called net assets, because it is equivalent to assets minus liabilities for a particular business. .

Balance Sheet BALANCE SHEET:  The fundamental accounting equation is the backbone of the accounting and reporting system.  It is central to understanding a key financial statement known as the balance sheet (sometimes called the statement of financial position).  The following illustration for Edelweiss Corporation shows a variety of assets that are reported at a total of $895,000.  Creditors are owed $175,000, leaving $720,000 of stockholders' equity.  The stockholders' equity section is divided into the $120,000 originally invested in Edelweiss Corporation by stockholders (i.e., capital stock), and the other $600,000 that was earned (and retained) by successful business performance over the life of the company.

Another Example of the Balance Sheet