As we have seen, the accounting equation is the pillar of accounting, and this is based on a system of registration by double entry, which is the same as for each position a subscription corresponds, and we can define it as the equality that exists between elements that make it up, which are:
Assets = Liabilities + Capital
Therefore, the accounting equation is applied at all times from the start of operations of the company, in the same way when it carries out different types of commercial transactions, understanding by transaction the fact or condition that requires a book entry or accounting record.
Basic elements of the “accounting equation”
To be clearer about the concept and numerically demonstrate the relationship of financial equality in the balance sheet equation, I consider that it is necessary that we first know the components of said equation.
As I mentioned earlier, the elements that make up this fundamental equation are: ASSETS, LIABILITIES AND CAPITAL.
First element of the accounting equation: Asset
We know by assets: the set of goods, rights and / or values that an entity owns, said goods have an economic value expressed in monetary terms, and is classified as:
Current Assets:
- Cash or cash Banks Inventories or Merchandise
Movable and immovable property, machinery and equipment, all these used for the normal development of its activities, we also know it as:
Non-current assets:
- Documents receivable Machinery Office furniture and equipment.
We also have intangible or intangible assets, they are those such as patents, inventions, etc. That contribute to the development of company activities.
Second element of the equation "liabilities or obligations to third parties"
A Liability is a present obligation of the company that comes from past events, whose settlement is expected to produce an economic benefit. We also know it as the set of debts and obligations to third parties pending payment on a certain date.
In other words, a company or organization has a liability when it "owes something" that can be expressed in monetary terms (cash or kind) and is classified as:
passive
Third element of the accounting equation "capital"
Capital represents the investment made by the owner or partners that make up the company, is reflected through the net result obtained from operations that increase or decrease the initial capital and represents at all times the difference between assets and liabilities.
Already having clear the concepts of the elements of said equation, and in conclusion I can say that All companies or organizations at the beginning of their activities when carrying out their transactions and continue with them during their commercial life period require investments (Assets), which of course they can be obtained through external financing (Liabilities) or internal (Capital), from this reality the so-called accounting equation follows.
Graphical representation of the elements of the equation and how the account is affected accounting
Graphical representation of the elements of the equation and how the account is affected accounting
