Accounting Equation Book Report

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Accounting Equation

The basic accounting equation is assets = liabilities + shareholder's equity. The equation reflects that the value of the firm lies with its assets, but that these can be acquired using two different methods of financing. The methods of financing are essentially different types of claims on the firm's resources. Liabilities are credit claims on the company's resources that arise when the company borrows from somebody (a bank or a supplier, often) in order to acquire assets. Shareholder's equity arises from the money that the shareholders invest. The value of the shareholder's equity is derived from the value of the firm, net of the amount owing to the creditors.

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Therefore, new profits that the firm earns but does not pay out in dividends ("retained earnings") will often form the bulk of the shareholder's equity.

The accounting equation also reflects that accounting transactions need to balance when they are recorded. If the company adds an asset, this must be paid for either through the company's equity or via a liability. One example would be buying a new piece of equipment on credit from….....

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