Purpose of The Accounting Equation

Posted by Ana Orwel on Tuesday, April 28, 2009

The final book for checking all the accounting records are done correctly or not is the Balance Sheet. It has two sides the assets and the liabilities. If these two sides of the Balance Sheet tally in that case we can say that all the accounting records are done correctly.

In that case the accounting equation is also satisfied with all its conditions. The basic which says: Assets= Liabilities + Shareholder’s or Owner’s Equity is satisfied fully. If in any case the Balance Sheet does not tally then we can say that there is some discrepancy in the transactions which has been recorded in the original books of accounts.

The purpose of the accounting equation is to reflect what assets the business has and how these assets are being financed, i.e. by liabilities or equity.

More information on the accounting equation here.