Assignment 2: Submission—Course Project

Accounting Equation

In the equation of accounting consists of two sides that ensure that the assets and its sources are justification. This particular equation brings about the double entry rule of accounting. The accounting equation should always be equal. This is because the assets controlled by a specific business are still the same as the capital in that particular business. This specific balance in the equation should always be at equilibrium because the accounting process applies the double entry rule, meaning that whatever happens on one side should be equal with what happens on the other hand.

Owners’ equity act’s as the main source of a given company’s assets. Owner’s equity increases when there is an increase in the revenues and also in the gains. In this particular instance, the revenue comes as a result of the various operations being undertaken in that particular business. However, the owner’s equity may decrease due to aspects such as expenses and also losses. Expenses and losses result in a decline in the owner’s equity due to any particular operations in the business that may lead to losses or an increase in expenditure (Bull, 2014). 

Net income or loss is directly proportional to the owner’s equity. To start with, net income can be defined as the remainder that is gotten after expenses are subtracted from the revenue. This means that owner’s equity tends to increase in case a company can generate profits, therefore an increase in the net income results to an increase in owners’ equity. On the other hand, a decrease in the net come leads to a drop in the owner’s equity. Additionally, a decline in the net income is also known to cause adverse owners equity (Shubik, 2014).

Usually, the accounting equation is in the form; assets=liabilities+ owner’s equity. The accounting equation can be applied to a bicycle repair shop. In this particular instance, the capital acquired, the bike parts and the accounts receivable are considered to be the assets. Additionally, any accounts payable are the liabilities in this particular instance while the expenses, in this case, are the owner’s equity.

References

Bull, R. J. (2014). Accounting in business. Butterworth-Heinemann.

Shubik, M. (2014, June). Accounting and its relationship to general equilibrium

theory.In Proceedings on the Conference Accounting and Economics in honor of the 500th Anniversary of the Publication of Luca Pacioli’s Summa de Arithmetica, Geometria, Proportioni et Proportionalita (pp. 226-234).