The concept of Accounting Equation belongs to the subject Accountancy. This particular equation is also known as the balance sheet equation. This special calculation discloses the relationship between the assets, owners equity of a business and liabilities at a time. This special strategy is the foundation of the idea of Dual Book managing System in the organisations.. Here for every equation the number of total debits balances the total amount that known as Credit.
The combination of Assets and Liabilities gives a result of the Capital
In a commercial organisation, capital reflects the equity part of the stockholders. Here balance system plays an essential role. It indicates that the left column of the equation always matches the right column of the sheet. Thus, it will reflect that the information between the investment and expense are logical.
This particular concept of Accounting Equation plays an essential role for any types of accounts. For example, if a buyer purchases an electronic gadget for $ 445. Here the student borrows an amount of $ 500 and another amount of $ 445 was earned from another source. Now according to accounting policy, the gross amount he posses is $ 945.Here the amount $500 will be calculated as liabilities and $ 445 as equity.
When the Asset amount is deducted from Gross amount then the Liabilities appears before the buyer.
Now this will reflect that the interest rate is same to the property (assets) minus debts (liabilities). There are some more equations are available in the accountancy. Some of them are simple, whereas some are based on complicated calculations. Here are some sample formulas that you can come across in Accountancy.
When the Equity amount equalises the sum of Capital and earned amount
The concept of Retained Earning is the result of the subtraction of Dividends from the Net Income
To get the Net Income accountants need to substract Expense from the Income
So in one word, Net Income is equal to Income
The concept of Financial Accounting is used in a broad way. Here are the applications that you will find in the commercial arenas.
Accounts related information
All of the commercial organisations need to prepare their quarterly and half-yearly records to present before the Audit team. Here the day-to-day records are kept in a ledger. The motto of this task is to monitor the cash flow, interest rates, loan payment, wages and various company related investments.
Double Entry Book keeping system
This system is based on the accounting system. Through this process, accountants make a fair balance between the debit and credit listing. It also helps to track the day to change in the account of that organisation.
Value of Company
To fix the worth of an organisation, accountants always depend upon the balance sheet. Through the balance sheet, the auditing experts calculate the net worth of an organisation. To do this, they gather the information on liabilities, assets, stocks and debts in detail.
Income and Retained System
This particular segment deals with the calculation of profit and loss of the organisation.After a calculation the organisation plans about the channels that they need to invest for more profit.