What would your accountant say? The president of your company has asked the cont

Question

What would your accountant say? The president of your company has asked the controller to give the members of the department a brief overview of the elements in the basic accounting equation (assets = liabilities + equity), including a description of each element and a sample of the accounts that might be contained within each element. At the last minute, the controller is called away and the president, knowing you are taking an accounting course as part of your MBA program, has asked you to fill in. What would your accountant say to the department?

Explanation / Answer

Answer : Asset = Liabilities + Equity is a basic equation of the accounts. It means sum of all the assets of the business is always equal to sum of all Liabilities and Equity. It means business treats the Equity as liability of the business. In accounts, every transaction has dual impact. Either one assets increase and other asset decrease, one asset increase and liability also increase, one asset decrease and liability also decerase, Equity increase and liability decrease, Equity increase and assets increase.

Assets : Asstes shown in the asset side of balance sheet. These assets classified under Fixed assets and current assets. Fixed assest are those assets which can be use for long time such as Buliding, Land, Equpiment and vehicle etc. Current assets are those asset that easily convertable to cash such as Cash, Inventory, Sundry debtors and marketable securities etc.

Liabilities : Liabilities shown in the Equity and Libilities sideof the balance sheet. Liabilities means the portion of Firm's asset that are owed to creditiors. Liabilitites can be classified under two heads Long term liabilities & current liabilities. Long term liabilities are those liabilities which are paybale in more than one year such as Bonds, Mortgage, Long term Bank Loan. Current liabilities are those liabilities which are payble with in one year such as account payable, short term Bank loan taxess payable etc.

Equity :  Equity shown in the Equity and Libilities sideof the balance sheet. Equity means the portion of Firm's asset that are owed to owner. Business treat the owner equity as a liabilities. It shown as Equity or share capital, Reserve, retained earning etc.

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