Accounting Equation

Accounting is a process of organizing and calculating financial data, which specifies the health and productivity of a business or entity. The accounting equation is a process of breaking down financial data into groups, which helps to decipher what a business owns during a specific period of time. The data retrieved from the accounting equation can then be used to build other financial reports that give details about a business’s current financials, cash flows, and profits or losses. Accounting is an important aspect of a business’s operations, because the financial data gathered from the accounting equation and other financial reports dictate what a business can and cannot do. A business will not be able to operate efficiently and will absolutely

Before we can go further into the accounting equation we must be able to recognize a transaction and be able to record it properly. A transaction is an event that affects the financial status of the company whether it increases or decreases an asset, liability, or stockholder’s equity. When a transaction occurs, there needs to be a detailed description of the transaction in order for the accountant to record it properly. For instance, a detailed transaction is JoJo’s Bakery paid a salary expense of $2,400 on August 5, 2015. A transaction that could not be recorded properly would be JoJo’s Bakery paid $2,400. An accountant needs to know the date of the transaction and the specifics, like the dollar amount, whether it was an expense, or if the money paid for the expense was a loan from the bank. All of these details are absolutely necessary in order to keep the accounting equation balanced. If we were to use the example above to record that into the accounting equation, we would record a negative $2,400 in assets (cash) and $2,400 in stockholder’s equity (expenses) and balance the total from any previous transactions. The reason for the negative $2,400 in assets (cash) and the positive $2,400 in stockholder’s equity (expenses) is that an expense is thought as a deduction, which is a negative amount and when calculated the accounting equation

Every step in the accounting process is important for the overall operations to be successful. If a person does not give enough detail about their transaction, then the accountant is unable to properly record it within the accounting equation. If someone made an error when recording data in the accounting equation, it could cause the equation not to balance and also give false information on the financial statements is someone did not catch the error. All accountants should take full responsibility for all recorded data and follow the generally accepted accounting principles. Accountants must perform their jobs at the highest level and be morally and ethically aware of the power that their position holds. Accounting is a process of organizing and recording financial data that helps with decision making and informs investors of the cash flows and financial situation of the