Accounting equation is the equation which is based on the equality of debits and credits which influenced the creation of double-entry bookkeeping system. The main elements of accounting equation are assets, liabilities and the equity of the owner and the equation looks like very easily – assets = liabilities + owner’s equity (or capital, finance). Obviously, the organization should be very careful about its financial activity in order to keep its revenue and expenditures under the strict control which will be used in the process of decision making. The business transactions which occur in a company influence its economic condition seriously and the owner will need to pay attention to the slightest transactions in order to maintain the gradual development of the firm and its revenue. The whole financial position of the company can be named with a one word – assets, or everything what the company owns. Assets consist of the two important components – liabilities and owner’s equity.
Liabilities are the elements and finance which the company owes to investors, shareholders and other partners who play the considerable role in the activity of the organization. The owner’s equity is the difference between the identifiers of assets and liabilities. So, the company actually possesses only the reason between the assets and the company’s owes to others. When one speaks about a corporation, there is a problem of the identification of the owner’s equity, as there is not a single but a great number of informal owners who are called stockholders. So, at a corporation owner’s equity is called stockholder’s equity as the finance is distributed between many people.
Accounting equation is the important component which helps to understand the manner of work of the accounting system. When the student wants to research the issue on accounting equation, he is able to prepare a detailed case study which will illustrate the student’s critical and analytical thinking skills. One will have to research the case site and define the nature of the problem which has occurred in the case and dwell on the cause and effect of the matter.
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