What is The Accounting Equation?
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What is The Accounting Equation?
Accounting is based on a simple principle which is known as the accounting equation. Let's assume that our friend, Redd, wants to start a business and that initially all of the money put into the business is provided by the owner or in other words Redd. This money will be spent on a range of resources for the business. Therefore resources in the business equal to the sources of finance put in from the owner or Redd. We can simplify this further by assets equals capital. It is highly unlikely that the business will only be financed by money invested from the owner or capital. The business will seek funds from other individuals or groups who are external providers of finance and these funds are known as liabilities. As a result the accounting equation can now be shown as assets equals capital plus liabilities.
