Hi Steemians
Today's business post will be short and precise. I want to quickly take the non-accounting people through what we call accounting equation.
Mere seeing the word Accounting Equation, what comes to your mind as a lay man?
For me, I will say it is the formula used for accounting in general, maybe in the calculation of certain things relating to business to know the position of the business or how the business is faring either financially or in any other way - Lay man's definition.
What is Accounting Equation?
Accounting equation can simply be described as the relationship between a business asset, liability and the owner's equity(capital in every business). In an accounting equation, there's always the summation or addition of a business capital(owner's equity) and liabilities.
Everyone here knows what an asset is, if we are asked but may be different in business to what we know it to be.
Asset is anything owned by a business whether tangible or intangible use in carrying out the day to day activities of that business. Examples are buildings, cars, furniture, cash, goods, land, raw material, stock etc. just that assets may be categorized.
Liabilities are the business owing, what the business own and is required or must pay to outsiders either in a short term or in a long term period. Example of a business liability is loan, goods bought on credit etc.
Capital(owner's equity) is the total sum of money or any other item brought into the business by the business owner, Capital is generally described as the money use in starting a business. Yes, It is the money use in starting a business but may not be the only money r the only item use in starting that business, A loan (liability) may be part of the money use in starting a business and a vehicle or a car may be part of what is use to start a business.
Hence, the reason I don't refer to it as the money use in starting a business. I refer to it as the money or any other item brought into the business by the business owner.
Therefore, Accounting Equation which is Asset = Liability + Capital is simply saying that the total item, tangible or intangible owned by a business is the combination of the business liability i.e owing to outsiders + the money or items brought into the business by the business owner.
You may think, since Liability is what the business is owing to outsiders, why is it referred to as the asset of the business?
It is an asset of the business because the business is in control of those things even though it is not for the business. To get the total asset of a business then you have to add up all the owing of that business to every other thing brought into the business by the business owner.
This is just a brief explanation of what an Accounting Equation is.
Thanks for reading and watch out for more useful business information.
Am sorry, I said the post will be short and precised.
I remain Bee
547 word count
Authored by Me and First Posted Here