Essay: THE ACCOUNTING EQUATION

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  • Subject area(s): Accounting essays
  • Reading time: 2 minutes
  • Price: Free download
  • Published on: November 14, 2017
  • File format: Text
  • Number of pages: 2
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The accounting equation also known as the balance-sheet equation, is the fundamental equation of the double-entry bookkeeping system that displays what is owned and what is owed by the owner or entity (Luthra, n.d.). The accounting equation is generally expressed in the form of ‘Assets = Liability + Owner’s Equity’, but for a corporation the equation is expressed as ‘Assets = Liability + Stockholders’ equity’, and for non-profit organizations, it is ‘Assets = Liability + Net Assets’. Because of double entry accounting, this equation should be balanced on both sides at all times. If at any point the sum of the debits for all accounts does not equal to the sum of the credits for all accounts then an error has occurred, thus this equation serves as an error detection tool. The accounting equation is typically express as a ‘balance sheet’ in the financial statement (Averkamp, n.d.).

In order to more fully grasp an adequate understanding of the development of the accounting equation we have to look to the origin of this equation. Luca Pacioli a Franciscan monk who is often called the ‘father of accounting’, was born in 1446 in Sansepolcro, Italy. He was an Italian mathematician who published a mathematics book titled ‘Summa de arithmetica, geometria and proportioni et proportionalita’ in 1494 which was published in Venice, Italy. It served as the only textbook for accounting up till the 16th century all around the world. within it contained a portion which had detailed descriptions of what we now call the double-entry bookkeeping system that enabled others to study, use and develop what we know today as the ‘accounting equation’ which is based or derived from the double-entry bookkeeping system (User, n.d.).

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