If a company uses $1,510 of its cash to purchase supplies, the effect on the accounting equation would be One asset increases $1,510 and another asset decreases $1,510, causing no effect.
The relationship between an entity's assets, liabilities, and owner's equity are represented by the basic accounting equation, often known as the balance sheet equation. It serves as the system's cornerstone for double-entry bookkeeping. The total debits and total credit for each transaction are equal.
There are three possible arrangements for the accounting equation:
- Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses.
- Owner's equity = Assets - Liabilities.
- Net Worth = Assets - Liabilities.
The accounting equation makes sure that every entry in the books and records is verified and that each obligation (or expense) and its associated source, or each item of revenue (or asset) and its source, can be independently verified.
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