Textbook Problem

What is the accounting equation? The balance sheet reports financial position from which two perspectives?

To determine

State the meaning of accounting equation and describe the two perspectives under which the balance sheet reports financial position.

Explanation of Solution

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.

Accounting equation is expressed as shown below:

$\text{Assets = Liabilities + Owners’ equity }\left(\text{Common stock+ Retained earnings}\right)$

 The two perspectives under which the balance sheet reports financial position are as follows:

• “Specific resources controlled by the company”
• “Claims by the persons or entities on the company” who provided the resources, including the creditors and lenders (liabilities) and investors (shareholders’ equity).