The accounting equation is considered to be the foundation of the double-entry accounting system. On a company's balance sheet, it shows that a company's total assets are equal to the sum of the company's liabilities and shareholders' equity.
Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.
KEY TAKEAWAYS
The accounting equation is considered to be the foundation of the double-entry accounting system.
The accounting equation shows on a company's balance that a company's total assets are equal to the sum of the company's liabilities and shareholders' equity.
Assets represent the valuable resources controlled by the company. The liabilities represent their obligations.
Both liabilities and shareholders' equity represent how the assets of a company are financed.
Financing through debt shows as a liability, while financing through issuing equity shares appears in shareholders' equity.
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Answer:
Accounting Equation
By JASON FERNANDO Reviewed by AMY DRURY
Updated Jan 24, 2021
What Is the Accounting Equation?
The accounting equation is considered to be the foundation of the double-entry accounting system. On a company's balance sheet, it shows that a company's total assets are equal to the sum of the company's liabilities and shareholders' equity.
Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.
KEY TAKEAWAYS
The accounting equation is considered to be the foundation of the double-entry accounting system.
The accounting equation shows on a company's balance that a company's total assets are equal to the sum of the company's liabilities and shareholders' equity.
Assets represent the valuable resources controlled by the company. The liabilities represent their obligations.
Both liabilities and shareholders' equity represent how the assets of a company are financed.
Financing through debt shows as a liability, while financing through issuing equity shares appears in shareholders' equity.