KD ACCOUNTING DISCUSSION

Instructions

Talk about accounting equation, accounting cycle, and accrual accounting.

In this area, we will discuss the significance of the accounting equation, the rules of debit and credit, and the steps in the accounting cycle. We will talk about recording of transactions, normal balances, and the creation of the trial balance.

Let’s begin by asking this question: What is the role of the accounting equation in the analysis of business transactions?

Part 2 reply to discussion

Good Afternoon Professor Shaik and Class,

The basic accounting equation is that Asset=Liabilities+Equity.  This equation does two important things: it gives us the foundation of  business transactions as every organization must own things, will owe other people, and has ownership by a person or persons and it ensures that we balance both sides of the equation preventing something coming from nothing. In the video posted, a great example is given for how this equation is used to analyze business transactions.  A pizza restaurant acquires a delivery vehicle worth $10,000 increasing our assets by $10,000.  The basic accounting equation tells us that this car cannot materialize out of thin air, we need to balance the equation.  If the vehicle was given to the business by the owner or partner, then their equity would increase by $10,000.  If instead the vehicle was bought via a loan from the bank our liabilities would increase by $10,000 to reflect that.  By following this principle and applying it to the myriad of different things a business needs as assets (land, equipment, office space, ect…) we ensure that all transactions are being tracked.  It is vital that a business understands that all assets have strings attached to them via a loss in cash, an increase on an account payable (a loan), or a change in equity.  The same principle is true for the other aspects of the equation.  A change in liabilities or equity will cause a change in assets through paying off a loan, paying shareholders dividends, or taking on additional debt.

Businesses must understand and utilize this equation and principles in order to ensure that all transactions are accurately tracked to prevent financial mismanagement.

Part 3 reply to discussion

Professor and Class,

What is accounting equation? What is its role in the analysis of business transactions?

The accounting equation states that assets equals liability plus equity. This is represented in the formula as thus: Assets=Liabilities + Equity.

Assets are things that we own. Liabilities are what we owe or what the creditors have claim on our business. Equity is our owners claim on the business. In every transaction the equation must be in balance. That is to say, the total value of the assets must be equal to the total liabilities and equity.

Common assets are cash, equipments, vehicle, buildings, supplies etc. All the things that we own will be assets. Liabilities will be monies owed to the bank, utility companies, employees (wages or salaries payable) or in simple terms, any payable is a liability; accounts payable (anything bought on credit) and wages payable.

Equity which is the owners claim (capital) on the business can either be reduced by withdrawals made by the owner and expenses (what we pay out) or it can be increased through revenues (what we sell). Revenue increases our profit while expenses decreases our profit. The video posted above demonstrates how the equation is used in a simple transaction involving the use of vehicle as an asset on one side of the equation and a liability (accounts payable) if acquired on credit from a bank.

The accounting equation is the foundation for preparing the balance sheet, a critical financial statement that presents a company’s financial position at a specific point in time. It helps analyst to understand the relationship between different financial statements, enabling them to perform ratio analysis, and other financial analysis techniques. It also helps to detect errors or discrepancies in financial records, as any transaction that violates the equation can indicate an error. Also, by applying the equation, businesses can make informed decisions about investments, funding and resources allocation, as it provides a clear understanding of the company’s financial position and performance.

Kimmel, P. D., Weygandt, J. J., Kieso, D. E., & Mitchell, J. E. (Undated). Financial Accounting: Tools for Business Decision Making, Enhanced eText (10th ed.). Wiley Global Education US.

https://devry.vitalsource.com/books/9781119783091Links to an external site.