Judul : Understanding Accounting Basic Equations as Accounting Basic Values
link : Understanding Accounting Basic Equations as Accounting Basic Values
Understanding Accounting Basic Equations as Accounting Basic Values
Basic Accounting Equations: Fundamental Elements of Accounting
Accounting Basic Equations are the foundation for all Accounting Systems. In fact, all accounting concepts and frameworks are based on Accounting Basic Equations. Accounting Basic Equations equates company assets with their obligations and equity. This shows all the assets of the company obtained either funding from debt or equity. For example, when a new company is built, the first asset purchased comes from funds received from investors or from loans (debt). Thus all company assets from creditors or investors are called liabilities and equity. If described by a formula, the formulation is as follows:
Assets = Liabilities + Equity
As you can see, the asset side is equal to the amount of liabilities and owner's equity. This makes sense if the frame of mind is liability and equity is basically just a source of funding for companies to buy assets.
This equation is generally written with the position of the obligation placed before the owner's equity. Because debt to creditors must be repaid before investors when the company goes bankrupt. In other words, liabilities are considered more smooth or liquid than equity. This is proven to be consistent with the example of financial reporting where Current Assets and Current Liabilities are always reported before Fixed Assets / PPE and Long-Term Debt.
This equation applies to all business activities and transactions. Assets will always be equal to liabilities and owner's equity. If assets increase, both liabilities or owner's equity must increase to balance the equation. Vice versa, if assets decrease, liabilities and owner's equity also decrease.
Components in Basic Accounting Equations
Now that we have a basic understanding of equations, let's look at each component of the accounting equation that starts with assets.
a. Asset
Assets are resources that are owned or controlled by the company to use their benefits in the future. Some assets are tangible like cash and some are intangible or intangible, such as goodwill or copyright. Here are some examples of asset accounts:
- Current assets: Cash, Receivables, Prepaid Expenses.
- Fixed Assets: Vehicles, Buildings.
- Intangible Assets: Goodwill, Copyright, Patents
b. Liability or Liability
Liabilities or commonly referred to as liabilities are a number of funds that the company borrows from other parties (creditors) and must be repaid in accordance with the agreed time. A common form of obligation is debt. Debt is the opposite of receivables. When a company buys goods or services from another company on credit, the debt is recorded to show that the company promises to pay later. The following are some examples of the most common liability accounts.
- Short-term Debt: Trade Debt, Bank Debt, Salary Debt, Tax Debt.
- Long-term debt: Bond debt
c. Equity
Equity is a part of company assets owned by shareholders or third parties. Owners can increase their share of ownership by investing funds in the company or reducing equity by attracting corporate funds. Similarly, income increases the equity side while costs reduce equity. Some general equity accounts such as Owner's Capital, Prize Withdrawal, Retained Earnings, Common Stock, Paid-in Capital.
Case Examples of Application of Basic Accounting Equations
The following are examples of cases of applying Basic Accounting Equations:
Gus is an entrepreneur who wants to start a company that sells musical instruments. After saving money for a year, Gus decided to officially start his business. He formed Guitars, Inc. and invested funds of Rp100,000,000 to his new company. This business transaction increases the company's cash and increases equity by the same amount.
Basic Accounting Equations
| ||
Asset
|
Obligations
|
Equity
|
Cash
|
Owner capital
| |
Rp100.000.000
|
Rp100.000.000
| |
Assets = Liabilities + Equity
| ||
After the establishment of the company, Guitars, Inc. need to buy some guitar supplies which will then be resold for a total of IDR 80,000,000. In this case, Guitars, Inc. use cash to buy assets in the form of inventory, so that the cash account decreases and the inventory account increases.
Basic Accounting Equations
| |||
Asset
|
Obligations
|
Equity
| |
Cash
|
Stock
|
Owner capital
| |
Rp 20.000.000
|
Rp 80.000.000
|
Rp 100.000.000
| |
Assets = Liabilities + Equity
| |||
After six months, Guitars, Inc. growing rapidly and need to find a new business place. Gus decided that it made the most sense for Guitars, Inc. to buy a building. Because Guitars, Inc. does not have IDR 500,000 in cash to pay for the building, the company must take a loan. Guitars, Inc. purchase a building for Rp500,000,000 by paying Rp.10,000,000 in cash and borrowing from the bank in the amount of the remaining Rp.490,000,000. This business transaction reduced cash by Rp.10,000,000, increased assets in the form of a Rp500,000,000 building and increased liabilities with a bank loan of Rp.490,000,000.
Basic Accounting Equations
| ||||
Asset
|
Obligations
|
Equity
| ||
Cash
|
Stock
|
Building
|
Bank Loans
|
Owner's Capital
|
10.000.000
|
80.000.000
|
500.000.000
|
490.000.000
|
Rp100.000.000
|
Assets = Liabilities + Equity
| ||||
The following are examples of the fundamental application of Accounting Equations. As you can see, the value of assets is always balanced with the amount of liabilities and equity.
As an Accountant, you must understand Basic Accounting Equations as a basic principle of accounting. If you already understand these fundamentals, you are already ready to work professionally. With the help of the Journal, your work as an accountant will be more efficient and effective. Journal is an online Accounting software that offers Accounting features based on general accepted Accounting principles.
The end of article Understanding Accounting Basic Equations as Accounting Basic Values
So this is the article Understanding Accounting Basic Equations as Accounting Basic Values this time, hopefully it can give benefit to you all. Alright, see you in another article post.
You know read this article Understanding Accounting Basic Equations as Accounting Basic Values with link adress https://bacheloraccounting.blogspot.com/2018/11/understanding-accounting-basic.html
