Carkod’s workplace

The accounting equation

Posted on: August 12, 2008

The accounting equation shapes the financial structure of a firm, it must satisfy:

the accounting equation

basic shape of the accounting equation

  • Assets are economic resources which benefits the business when it is running. They´re basically distributed in current assets (inventory, cash), withhold within a year or during the normal accounting period if the business cycle is longer than one year; long-term assets (plant assets), withhold more than one year; and intangibles (such as patents).
  • Liabilities are business debts and obligations that must be satisfied within a determined period. Short-term liabilities (salaries) have to be paid within one year or during the normal accounting period if the business cycle is greater than one year. Long-term liabilities are held more than one year, although they´re split into short-term liabilities.
  • Owner´s equity should be split into several accounts as the common stock, which is the capital invested at the business beginning stages, the retained earnings account as said before. And it should be like this:
stockholder´s equity

stockholder´s equity

source: my notes and “financial accounting by horgren and harrison 6th edition”.

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