Financial accounting is based on accounting equation. The resources are possessed by the firm as assets. Some of the resources will have to be supplied to the firm by the owner of the business. The total amount supplied by him is known as his capital. Some of the assets of the business have been provided by someone other than the owner. The indebtedness of the firm for these resources is known as liabilities. The capital must be equal to assets minus liabilities.
So the accounting equation has two sides and they must be equal. The equity of the twosides will always be true. Capital is often called the owner's equity or net worth. Keeping in view the two types of equities, the equation given above can be stated as below:
So the accounting equation has two sides and they must be equal. The equity of the twosides will always be true. Capital is often called the owner's equity or net worth. Keeping in view the two types of equities, the equation given above can be stated as below:
Assets = Liabilities + Capital
OR
Assets = Liabilities + Capital
OR
Liabilities = Assets - Capital
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