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How to Solve Accounting Equations
Accounting is a topic which reminds us of the commercial math that we used to have in our HG level. This topic requires lot of calculations and is quite engrossing as well. The more we read about this topic the more we get to know the intricacies involved in solving the problems covered under this. There are certain equations which need to be understood inside out so that the main topic becomes quite easy for anyone to comprehend.
Before we get into the equations we have to get used to the terms used in these equations or rather relation that exists between these accounting terms. Terms like assets, capital and liabilities have to be understood in depth before we could make use of the formulas involved.
Terms like balance of payments or balance of total assets etc needs to be understood as well so that the real calculations become easier to handle. In terms of assets liabilities and capital we do have a working formula and that could be rewritten as per our requirements. The formula that we have with these terms is
Capital = Assets – Liabilities or in case we need to find the liabilities then its just reintroducing the same formula with liabilities as the main term of the expression. The same equation becomes
Liabilities = Assets – Capital
Sometimes the same set of information could be asked in a completely different format and the equation becomes
Assets = Liabilities + Owner’s Equity
The above mentioned relation basically is used when the accounting equation is used mainly for sole proprietorship.
The equation which is prevalent for corporation is little different than others and has a different term used.
The same relation now has to be mentioned from stockholders point of view and thus the relation looks like
Assets = Liabilities + Stockholders Equity
As far the formula is concerned anyone could recall it but to make use of the information from the question and identify which exactly should be taken for asset and what is considered as liability is what one needs to learn and apply.
Liability could be considered as a company’s obligations. So one has to go through the givens in a particular question to find these facts out and then reintroduce these into the equation. In some cases the total assets needs to be understood from whatever movable and immovable subjects are considered from. Once one understands the assets and how much of the outstanding obligations are pending then it becomes easier to make use of the accounting equation.