|
As a freelancer, who are thinking of going into business, or who
is already conducting business, you have to start learning about
the basic concepts of Accounting because they are the concepts
that are used in reporting your business activities to the
government come tax time. It is time you must know about one of
the most fundamental concepts in accounting.
Accountants process data into documents called financial
statements. It is the accounting equation that is the basis for
the entire accounting system.
So what is this magical equation?
The Accounting Equation is:
ASSETS = LIABILITIES + OWNERS’ EQUITY.
In crude definition,
ASSETS are economic resources of the business that are expected
to bring benefits for the business in the future.
LIABILITIES are economic resources borrowed by the business from
another person or an organization.
OWNERS’ EQUITY is the economic resources that was contributed by
the owners of the business to the business.
One way of thinking of this equation is that the left side is
what the business has including its money, equipment, building,
land, furniture, etc… The right side indicates where these
assets had come from. Were they borrowed from parties outside
the business, or were they contributed by the people who own the
business.
The other version of this equation, that you might bump into is
the:
ASSETS – LIABILITIES = OWNERS’ EQUITY.
In other words, if the business’s assets pay off all its
liabilities, you are left with a figure that indicates the
economic resources that belongs to the business’s owner.
It is pretty much the same thing, a concept of transposition in
algebra.
If you take a look at a business’s BALANCE SHEET – or what is
now modernly called as A STATEMENT OF FINANCIAL POSITION –
you’ll notice that all the items in there are arranged following
this accounting equation in either one of its versions.
Of course in a BALANCE SHEET, it is written vertically, instead
of horizontally as it is in the equation.
You’ll see the items arranged somewhat as:
ASSETS XXX LIABILITIES YYY OWNERS EQUITY ZZZ
Where, XXX = YYY + ZZZ.
So, next time you see a balance sheet aka statement of financial
position, take the time to recognize this logic.
About the author:
Marquez Comelab is a private currency trader based in Melbourne
, Victoria . He is the founder of TheFreedomToChoose.com - an information portal about trading financial markets,
real-estate and business and OrangesAndLime.com -
producers of cards, prints & posters. Contact him at
mqz@orangesandlime.com.
|