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ACC 300 Accounting Equation

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• Published : April 6, 2015

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Accounting Equation Paper
Keegan Mueller
ACC 300
University of Phoenix
2/9/2015
Brian Lichau

The Accounting Equation
The accounting equation consists of three different entities within an organization; assets, liabilities, and stockholders’/owner’s equity. With these three principles, a company can measure their financial position. The main purpose behind the accounting equation is to figure out what assets the company has. In doing so, they must take into account the liabilities and owner/stockholder equity. The equation is simple: Assets = Liabilities + Owner/Stockholder Equity. The equation is able to illustrate what the company owns versus what it owes. The difference will either be a positive or negative based on how much money the company is making.

Broken down, the assets are the company’s resources (what the company owns), liabilities are a company’s obligations (what the company owes), and owner/stockholder equity illustrates the amount of money invested in the company by the owners along with the net income that has not been paid out through dividends yet.

The balance sheet is what reports the company’s assets, liabilities, and owner/stockholder equity at any given time. Entries are made on the balance sheet that correlates with each category of the assets, liabilities, equity. Debits and credits are made based on whether money is coming in or going out; debits on the left and credits on the right. The balance sheet should show that the total amount of assets equals the total amount of liabilities plus owner/stockholder equity. If a company owes more to the owners/stockholders, it means that they did not make enough money. The assets should always equal liabilities and stockholder equity.

Another important statement used is the income statement. The income statement illustrates a company’s revenues. The result is the net income of the company. The income statement differs from the balance...