M1 A2 Instructor Response
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Get Help Now!A balance sheet equation is a statement that shows the state of a business at a particular time by computing assets, liabilities, business capital and balancing income over expenditure (Balance Sheet, 2016). The equation is a crucial part of accounting as it forms the element for entire double entry accounting scheme.
The equation starts with assets. Assets are all the resources that companies use to achieve its goals (Riggs, 2007). Assets may be long term or short term. Short-term assets include cash either solid or liquid form, inventories, and account receivable. Long-term or fixed asset includes machinery, tools, vehicles and all other properties. In most cases, the fixed assets are not fully owned by the business. This suggests that a loan might have been taken to purchase a vehicle, a mortgage on a construction, or even used money from shareholders. All these loans are taken into consideration in the liability section of a balance sheet equation (Halpin & Senior, 2009).
Claims on business assets by the financial institution, other companies or people is called liability. It is fully guaranteed that a running business has a debt somewhere and ignoring this concept would lead to misleading business accounts (Consolidated Balance Sheet, “ n.d). Mortgage and loans are examples of long-term liability while debts in terms of notes payable, accounts and accruals are short-term liabilities.
The third part of the equation is equity. Capital also referred as equity is shareholders claim on the company properties. Money contributed by owner at the start of the business or shareholders for a proprietorship ticket is accounted for here (Riggs, 2007). Equity also accounts for returned earnings that are money held in the business to be reinvested.
The summation of claims by shareholders and claims by debtors gives total company assets.
Assets = Liabilities + Equity
M1 A2 Instructor Response
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