Individual Assignment Accounting Equation Paper From the largest corporation all the way down to the mom and pop store every business transaction will have an effect on a company s financial position According to Investopedia com the financial position of a company is measured by the following three things assets liabilities and owner s equity The assets are what the company owns The liabilities are what the company owes to others The owner equity is the difference between the assets and liabilities The accounting equation offers a simple way to understand how the three amounts relate to each other The accounting equation for a sole proprietorship is as follows Assets Liabilities Equity The accounting equation for a corporation is as follows Assets Liabilities Stockholders Equity Examples of assets include cash account receivable and equipment Kimmel 2011 From the accounting equation you can that the amount of the assets must equal the combined amount of liabilities plus owner s or stockholders equity Examples of liabilities include notes payable accounts payable and salaries payable Kimmel 2001 Examples of owner s or stockholders equity include common stock and retained earnings The balance sheet is also known as the statement of financial position It reflects the accounting equation The balance sheet reports a company s assets liabilities and owner s or stockholders equity at a specific point of time Just like the accounting equation the balance sheet shows that a company s total amount of assets equals the total amount of liabilities plus owner s or stockholders equity If a company keeps accurate records the accounting equation will always be in balance That means that the left side should always equal the right side The balance is maintained because every business transaction affects at least two of the company s accounts For example when a company borrows money from a bank the company s assets will increase and its liabilities will increase by the same amount When company purchase equipment with cash one asset will increase and another asset will decrease Because there are two or more accounts affected by every transaction the accounting system is referred to as double entry accounting References Investopedia n d Accounting Equation Definition Retrieved from http www investopedia com terms a accounting equation asp Kimmel P D Weygandt J J Kieso D E 2011 Financial accounting Tools for business decision making 6th ed Hoboken NJ John Wiley Sons