Basic Accounting Equation

Basic Accounting Equation Definition of Basic Accounting Equation The basic accounting equation is a calculation that can later project the wealth, debt, and capital owned by the company. As we know, the general principle of accounting that we know is that there is a balance between the income side and expenses or a balance between assets/liabilities owned by the company and liabilities. The balance of numbers between the two parts must of course be analyzed more deeply with the basic accounting equation. Later the basic accounting equation is used to assess the company's ability to manage company finances. Principles of Basic Accounting Equation The Basic Accounting Equation is often referred to as PDA, and is a basic concept that economists or aspiring accountants should be familiar with. All companies must have assets (also known as means of launching liabilities), as well as liabilities (expenses to be paid). The principle of the basic accounting equation mathematically connects the company's assets with debt and capital. The property or asset part of the company is included in the Assets section, while debt and capital are included in the Liabilities section. Basic Accounting Equation Formula The formula of the basic accounting equation is as follows: Assets (Assets) = Debt + Capital (Liabilities) The greater the debt on the liabilities side, the greater the imbalance on the assets side. If there is a transaction that is not transparent or not reported, it will also be seen by calculating the principle of the basic accounting equation. In order to create the concept of transparency, it is also important to have auditing, which is better known as the concept of Good Corporate Governance. Benefits of the Basic Accounting Equation The basic accounting equation is of course calculated not without reason. Of course there are various benefits that can be obtained by the accountant or company from this basic accounting equation table. Here are the various benefits that can be obtained from the basic accounting equation table: • Can be Used as a Source of Records This source of records can later facilitate the process of recording financial transactions. The basic accounting equation contains basic information related to financial transactions that enter and exit the company's account so that later it facilitates the process of making financial statements. • Reference in Balance Checking As a means of checking the amount of balance coming in and out of the company's account. Unlike the financial statements that provide detailed reports, the basic accounting equation provides an outline of financial transactions. • Tool to Correct Balance Accuracy The next benefit is as a means of correcting the accuracy between the balances on the asset side and the liability side. The calculation of the balance on both sides of the basic accounting equation table will leave a balanced figure if all transactions have been reported as well as possible. Components of the Basic Accounting Equation We have discussed a little above about the two sides that must be present in a basic accounting equation table. That is the Assets side and the Liabilities side. Well, of course, the two sides cannot just be filled with what is included as assets, debts, or capital. To clarify the various components in the basic accounting equation, here is an explanation 1 Asset Account (Assets) Asset is a term for something that brings benefits to the company. Examples include buildings, vehicles, land, and so on. Cash and cashier's checks are also included in the company's assets. The assets section will increase if the company's assets increase, and decrease otherwise. 2 Liability Account As the name suggests, a liability account is a type of account that contains the company's responsibility to certain parties. This account can also contain various company obligations arising from an event in the past. For example, liabilities arising from the company's debt to seek capital. These obligations are usually of a nature that must be paid immediately at a predetermined deadline or deadline. Liabilities should also be paid as soon as possible if a company's business activities have made a profit. The liabilities section will increase if the liabilities account increases, and vice versa if it decreases. 3 Capital Account (Equity) The equity account is a capital account which is the remaining interest of the company after deducting liabilities. In short, the equity section is filled with the remaining capital value after deducting liabilities. That way, both parts of the assets and liabilities can get a balanced value. Usually, the equity account is the part of the assets held by third parties, such as shareholders or stakeholders. These holdings can increase and decrease according to real conditions.