The Accounting Equation And Explain Its Components Accounting Essay


This is equation that is the foundation of double entry accounting. The accounting equation shows that all assets are financed by borrowing money or paying with the money of the company's capital.

The main components of the basic accounting equation are:

Assets are resources owned by a business

Liabilities are claims against assets

Owner's equity are the claims of owners


Assets = Liabilities + Capital

This is a resource with economic value which explains that company controls or owns in the hope that it will give future benefit. Assets are purchased to enhance the value of a company or benefit the company's operations.

Assets are either current or fixed (non-current).

Current assets are assets which have a short life. Which are consisting of cash, accounts receivable, goods for resale and inventories of goods.

Nun-current (fixed assets) are assets having a long life bought with the intention to use them in the business. Fixed assets include things like buildings, machinery, motor vehicles, fixtures and fittings.


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Liabilities = Assets - Capital

It is the name given to the amounts owing to these people for these assets. Liabilities are solved over time by transfer of economic profits including money, goods or services. Liabilities are consisted loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are one of the most important aspects of a firm's operations because they are used to finance operations and pay for great decomposition.

For instance, the unpaid money that a firm owes to its suppliers would be deliberated a liability.

Outstanding of finance and accounting and this term only concerns to any money or service that is now owed to another party. One type of liability, for instance, would be the property taxes that a homeowner owes to the municipal government.

Current liabilities are debts payable within no more than one year, while nun-current liabilities are debts payable for longer period.


Capital = Assets - Liabilities

The amount of the resources supplied by the owner. And also it is often called the owner's equity or net worth.

Capital is an extremely uncertain term and its specific definition depends on the context in which it is used. Usually, it refers to financial resources available for use.

The financial position of a business at any time is represented in the balance sheet. Why is it that every business entity's position should 'balance'?

Balance Sheet displays the financial position of a business at a specific point in time. This is also known as a "Statement of Financial Position ''. The basic elements of the financial position are Assets and Liabilities. These two counter components of balancing form the Balance Sheet Equation.

Assets= Liabilities

In every business entity's position should be balanced. It is necessary in order to control your business. And you can know about your company's income and about expenditure.

Describe the accounting cycle and explain its components

It is accounting cycle which is starting with the recording of the transactions and ending with the preparation of the final accounts .The consistent steps we in an accounting cycle are as follows: a) The Journal, b) Posting, c) Balancing, d) Trail balance, e) Income statement, f) Position statement (balance sheet)

Journal- it is book of original entry for all items

Posting- the transfer procedures information into ledger accounts from books of original entry

Balancing- balance between two sides of an account and then general rule off the account

Trial balance- a list of account names and their balances in the ledgers, on a particular date, shown in debit and credit columns

Income Statement- the financial statement where are presented the calculations of gross profit and then net profit

Financial Position Statement (Balance Sheet)- it is used to refer to statements produced at the end of accounting periods, such as the income statement and the statement of financial position

Explain the difference between trade discount and cash discount.

Trade Discount: Retention in price determined wholesaler/manufacturer to the retailer at the list price or catalogue price.

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Cash Discount: Reduction in price given by the creditor to the debtor called as cash discount. This discount is designed for to speed payment and thus provide liquidity to the firm. They are sometimes used as a advertising device.

The differences between trade and cash discount that trade discount is not introduced anywhere in either the ledger accounts or the financial statements. Cash discount can appear in the cash book and is always shown in the financial statement.

Outline the purpose and content of an invoice, a debit note and a credit note.

Invoice is a bill which indicates the amount that must be paid by the buyer to the seller. There is no standard form or style of invoice and as such it can be designed according to requirements of the seller. It can be prepared in three or more copies as accordance with the requirements concerned. The invoice can be sent with the goods or at a later date. When cash is paid at the counter of the store then cash memo is issued by the seller to the buyer.

Contents of Invoice ↓


Name of customer

Invoice number

Folio column

Final amount of invoice

A debit note: Is a note indicating the amount owed by a person or company. The debit note serves the same purpose as an invoice.

A credit note: it is also known as Credit Memo. It is a letter or form sent by a seller to a buyer stating that a certain amount has been credited to the buyers account. And also are issued when there is a mistake or return of goods.

Explain the types and purpose of each books of prime entry

Cash book: it is a financial journal in which all cash receipts and payments, and also bank deposits and withdrawals. Records in the cash book are then posted into the general ledger. The cash book is agreed with the bank statements as an internal method of auditing.

Sales day Book: a book in which cashless sales are reflected with details about customer, invoice, amount and date; these parts are later posted to each customer's account in the sales ledger.

Purchases day book: A book in which all purchases are recorded first, before being transferred to the main ledger. Also called purchase day book.

Returns inwards day book: it is a book of original entry for goods returned by customers. Also known as Returns Inwards Journal or the Sales Returns Book

Returns outwards day book: it is book of original entry where purchases returns journal is a book in which goods returned to the supplier are recorded. This book is called as returns outwards and purchases returns day book.

General Journal: it is book of original entry where recorded all transactions, before the entries are made in the double entry accounts.