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Basic Financial Statements

 Self-Paced Overview

The Accounting Equation

The Accounting EquationThe Accounting Equation:Assets = Liabilities + Owners' Equity is an essential notion in financial accounting. The equation derives from assets and claims on assets.

Assets are what a company owns, such as equipment, buildings and inventory. Claims on assets include liabilities and owners' equity. Liabilities are what a company owes, such as notes payable, trade accounts payable and bonds. Owners' equity represent the claims of owners against the business.

Assets

  • Assets:
        What a company owns.
 

Claims on Assets

  • Liabilities:
        What a company owes.
  • Owners' Equity:
        Claims of owners against the business.

The basic equation that expresses the relationship of assets and claims on assets is called the accounting equation:

Assets = Liabilities + Owners' Equity

Some basic assets and claims on assets are listed below.

Assets

Assets

Cash
Inventories
Buildings
Land
Equipment
Accounts Receivable
Marketable Securities

 

=

Claims on Assets

Liabilities

Accounts Payable
Wages Payable
Taxes Payable
Notes Payable
Bonds Payable
Intermediate Term Debt
 

+

Owners' Equity

Preferred Stock
Common Stock
Capital Surplus
Retained Earnings

In other words, the equation illustrates that the assets of the company must equal the claims against the company. Those claims arise from both creditors of the company and owners of the company.

Using the accounting equation, if two of the three components are known, the third can be solved. For instance:

Assets = Liabilities + Owners' Equity
$200,000 = $50,000 + ?

Owners' Equity must be $150,000

($200,000 − $50,000)

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