The Accounting Equation can be written as Liabilities equal to Assets minus Capital? true or false
The correct answer and explanation is:
Answer: True
Explanation:
The Accounting Equation is a fundamental principle of accounting that represents the relationship between a company’s assets, liabilities, and owner’s equity (capital). It is typically written as: Assets=Liabilities+Capital\text{Assets} = \text{Liabilities} + \text{Capital}
This equation shows that everything a business owns (assets) is financed either by borrowing money (liabilities) or by funds from the owners (capital or equity).
If we rearrange this equation to solve for Liabilities, we get: Liabilities=Assets−Capital\text{Liabilities} = \text{Assets} – \text{Capital}
So, the statement “Liabilities equal to Assets minus Capital” is true. This rearranged form is algebraically correct and reflects the same relationship among the elements of the accounting equation.
Understanding this equation is crucial because it serves as the foundation for double-entry bookkeeping. In every transaction, the equation must remain balanced. For example, if a company purchases equipment for cash, one asset (equipment) increases while another (cash) decreases, keeping the total assets unchanged. If the company takes a loan to buy equipment, both assets and liabilities increase equally.
Here’s a practical example:
- A company has assets worth $100,000.
- The owner’s capital is $60,000.
- Using the equation:
Liabilities=Assets−Capital=$100,000−$60,000=$40,000\text{Liabilities} = \text{Assets} – \text{Capital} = \$100,000 – \$60,000 = \$40,000
This means the company owes $40,000 to creditors, and the remaining $60,000 belongs to the owner.
In summary, understanding how the elements of the accounting equation relate helps in accurately recording financial transactions and preparing financial statements. The equation ensures that a company’s books are always in balance, making it a cornerstone of sound financial management.