User:Zvi~enwiki/Meaning of accounting

Meaning of the accounting equation

The value of a company can be understood simply as the useful assets that ownership of a company entitles one to claim. This value is known as Owners' Equity. Some assets of a company, however, cannot be claimed as Equity by the owners of a company because other people have legal claim to them - for example if the company has borrowed money from the bank. The value of a resource claimable by a non-owner is called a Liability. All of the Assets of a company can be claimed by someone, whether owner or not, so the sum of a company's Equity and its Liabilities must equal the value of its Assets. Thus the accounting equation describes what portion of a company's assets can by claimed by the owners.

Various account types are classified as 'credit' or 'debit' depending on the role they play in the accounting equation.

Assets = Equity + Liabilities (move assets to the right)

0 = -Assets + Equity + Liabilities

or

0 = (-) Assets                         + Owners' Equity              (+) Liabilities  
          .       _____________________________/\____________________________    .
          .      /    + Retained Earnings                  (+) Common Stock  \   .
          .    _________________/\_______________________________      .         .
          .   / (-) Expenses     (+) Beginning Retained Earnings \     .         .
          .     (-) Dividends    (+) Revenue                           .         .
    \________________________/  \___________________________________________________/
      (-)increased by debits                       (+)increased by credits