   Chapter 2, Problem 4TF

Chapter
Section
Textbook Problem

The accounting equation (Assets = Liabilities + Owner’s Equity) must always be in balance.

To determine

State whether the given statement is true or false.

Explanation

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners.

The three primary elements of accounting equation (Assets, liabilities and owners’ equity) are expressed as shown below:

Assets = Liabilities + Owners’ equity (Common stock+ Retained earnings)

This equation states that both outsiders and insiders have interest in the assets of a business. If two elements are identified, the third one can be computed. For example, assume that the total of assets is $50,300. On the same day, the business liabilities comprise of$6,500 owed for supplier. Owners’ equity is calculated by subtracting total liabilities from total assets ($50,300$6,500=\$43,800)

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