Accounting Equation In Accounting

1.0 Introduction

Accounting is the process of work where an accountant or account related personnel keeps the company’s financial accounts. The process of work includes recording, storing, sorting, retrieving, summarizing and presenting in financial reports. The purpose of accounting is to provide information that is needed for making of economic decisions and to help in defining the financial position of a company. Accounting is very important to a company.

2.0 Accounting Equation

The Accounting Equation also called the balance sheet equation is the most basic principle used in accounting. It relates to three categories of accounts, assets, liabilities and owner’s equity. It states that during the period, the value of assets a business

It is also items that can be converted into cash. It increases the value of a business. Compare to others who have fewer assets, the larger the amount of assets a business has, the stronger the business. Assets can be categorized to 2 types, Non-current assets and Current assets.

2.1.1 Non-current assets

A non-current asset also called fixed assets is a long term investment of a company. Thus, the value of the asset will not be realized within the accounting period of one year. Non-current assets usually refer to assets that will be used for more than a year. Example: Premises, Machinery, Motor Vehicles, Fixture & Fittings, etc.

2.1.2 Current Assets

Current assets are assets that are expected to be converted into cash within a year or less of business, but not for more than one year. Current assets are the assets that are used for daily business operation purposes. Each business’s current assets differ from another. Example: Inventories, Bank, Cash, Account Receivables, Prepaid Expenses and etc.

2.2

Liabilities can be reduced by transfer of money, goods or services to the owed. Liabilities are important aspects of a company because they were used in financing an operation and paying for large expenses or expansion of the business. Outside of accounting, the term liabilities simply refer to money or service that is owed by a party to another party. There are 2 categories of liabilities, Non-current liabilities and Current liabilities.

2.3.1 Non-current liabilities

Non-current liabilities also called long-term liabilities are long-term financial loans or debts that will not due within the financial period, one year. Example: Capital lease, Mortgage loan and etc.

2.3.2 Current liabilities

Current liabilities are short-term financial loans or debts that will due within the financial period of one year. These loans or debts are to be paid within a short period of time. Business would withdraw cash from current assets in order to settle their current liabilities. Example: Short term debts, Accounts payable and etc.

2.4 History of the Accounting