Course Project

Running Head: THE ACCOUNTING EQUATION 1

THE ACCOUNTING EQUATION 4 4

 

Week X

The Accounting Equation

Student Name: XXX

Institution: XXX

Course: XXX

Date: 7th December, 2018

Relationship between Economic Resources and Claims to Economic Resources

Economic resources are considered to be the assets of the business as because they are probable to flow the economic benefits to the business in the future. On the other hand, the claims to economic resources means are of two types, one is the owner’s claim and the other is the outsider’s claim. The owner’s claim is called the owner’s equity and the outsider’s claim is called the liabilities for the business.

Why must this equation always balance?

The accounting equation (i.e. assets = liabilities + owner’s equity) must always be balanced at any time and this is because of the double accounting system. Under the double accounting system, the total amount of the debits must be equal to the total amount of credits for each journal entry (however the number of debits and credits could vary). These are the main reasons of having the balanced accounting equation after recording of each journal entry (Averkamp, 2018).

What transactions increase or decrease owner’s equity?

The transactions, which increases the owner’s equity majorly include the owner’s contribution (i.e. whether in the form of cash or the noncash assets) and the net income (i.e. the owner’s equity increases for the net income at the time of making the closing entries).

On the other hand, the transactions which decreases the owner’s equity include the owner’s withdrawals/drawings and the net loss (i.e. the owner’s equity decreases for the net loss at the time of making the closing entries).

How does net income or loss affect owner’s equity?

The net income or the loss is to be closed (i.e. at the end of the accounting period) to the owner’s capital account and that is the reason that the owner’s equity always been affected by the net income or the loss. For example, the net income will result in an increase in the owner’s equity and the net loss will result in the decline of the owner’s equity (fool, 2017).

Provide an example of a transaction, applied to the accounting equation.

The owner has invested amounting $30,000 to the business.

Assets = Liabilities + Owner’s Equity

Cash = $0 + Owner’s Capital

$30,000 = $0 + $30,000

$30,000 = $30,000

So, the above transaction result in an increase in the assets account (i.e. in the form of cash) and the increase in the owner’s equity (i.e. in the form of owner’s capital account) and the accounting equation remains balanced as presented above.

Works Cited Averkamp, H. (2018, 02). Accounting Equation. Retrieved from www.accountingcoach.com/accounting-equation/explanation: https://www.accountingcoach.com/accounting-equation/explanation fool. (2017, 06). What Is the Relationship Between Net Income and Owner's Equity? Retrieved from www.fool.com/knowledge-center/the-relationship-between-net-income-owners-equity.aspx: https://www.fool.com/knowledge-center/the-relationship-between-net-income-owners-equity.aspx