The Accounting Equation Essay

The Accounting Equation Essay

Economic Resources and Economic Claims

 The Accounting Equation Economic resources refer to assets that the company owns or control, which are expected to generate future economic benefits. For example, inventory, machinery, equipment, and furniture. Economic claims, on the other hand, are liabilities and claims that creditors and shareholders have against the business assets (Needles, Powers & Crosson, 2013). For instance, loan, dividend, and common stock.

Why Accounting Equation Must Balance

The balance must always balance because each transaction has an impact on at least two accounts. For example, when a company borrows money from a financial institution, its assets and liabilities increase by the same amount (Nwosu, 2013). In addition, when a business acquires supplies for cash, one asset will decrease while the other one will increase. This system is called double-entry accounting since two or more accounts are affected by a single transaction.

Transactions That Increase/Decrease Owners’ Equity

A transaction that increases total assets have a corresponding increase in owners’ equity. For example, a cash investment meant to increase business revenue. On the other hand, increase in liabilities resulting from the process of operating the business decreases owner’s equity. For example, owner’s drawing of business assets for personal use. In addition, if a business hires services for technical support or on-site repairs, the invoice generated reduces owner’s equity by increasing the total liabilities (Schaltegger & Burritt, 2017). A net income has a corresponding increase in Retained Earnings.  This increases the percentage of amount to be reinvested by the business to increase future earnings hence resulting to an increase in stockholders’ equity. If a business suffers a loss, there is a decrease in retained earnings hence leading to decreased owner’s equity.

ESSAY

The Accounting Equation Essay