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The accounting equation used in business must always be kept in balance - the assets on one side of the equation must equal the claims against the assets on the other side:

Assets = Liabilities + Owners' equity

These claims arise from credit extended to the business (liabilities) and capital invested by owners in the business (owners' equity). The claims of liabilities are significantly different than the claims of owners; liabilities have seniority and priority for payment over the claims of owners.

Suppose a business has $10 million total assets. The money for the assets came from somewhere. The business's creditors (to whom it owes its liabilities) may have supplied, say, $4 million of its total assets. Therefore, the owners' equity sources provided the other $6 million.

Business accounting is based on the two-sided nature of the accounting equation. Both assets and sources of assets are accounted for, which leads, quite naturally, to double entry accounting. Double entry, in essence, means two-sided. It's based on the general economic exchange model.

In economic transactions, something is given and something is received in exchange. A common example involves a business that borrows money from its bank. The business gives the bank a legal instrument called a note, promising to return the money at a future date and to pay interest over the time the money is borrowed. In exchange for the note, the business receives the money.

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What must be done if a transaction increases the left side of the accounting equation?

Correct the transaction so that the double entry also increases the right hand side of the accounting equation so that the equation (always) balances.


How many entries are needed for each accounting transaction?

There must be always a 'Credit' whenever there is a 'Debit' so there must be 2.


What if Trial balance debits and credit equals?

If you do a Trial Balance and your Credits Equal your Debits, then more than likely your books are correct.In double entry accounting the debits and credits must balance or be equal.


What must be true of every correct accounting entry?

Every correct accounting entry must adhere to the double-entry accounting system, meaning it must have equal debits and credits to ensure that the accounting equation (Assets = Liabilities + Equity) remains balanced. Additionally, each entry must be properly documented with relevant supporting evidence, such as invoices or receipts, to maintain accuracy and transparency. Lastly, entries must be recorded in a timely manner, reflecting the actual financial transactions of the organization.


What does the word credit mean in terms of accounting?

The word "credit" is part of the equation of double-entry bookkeeping. In order for bookkeeping entries to balance, there must always be a debit (left side, abbreviated by "dr") and credit (right side, abbreviated by "cr") entry that equal one another. For example, to record a Office Supply Store purchase (on account ~ a payable), the entry would be: Office Supplies Exp $500.00(dr) Accounts Payable $500.00(cr) If an entry does not balance the totals for debits and credits, your books will be out of balance.

Related Questions

What is the first rule in accounting?

The equation must be ALWAYS equal.


What is the role of accounting equation in the study of accounting equation?

you did the mathh wrong and must re-do it


What must be done if a transaction increases the left side of the accounting equation?

Correct the transaction so that the double entry also increases the right hand side of the accounting equation so that the equation (always) balances.


What is some advice for solving systems of equations?

Always keep the equation in balance inasmuch that what is done on the RHS must be done on the LHS of the equation.


What happens if the accounting equation does not balance?

Due to its design. It was intended as check that your records were correct - think of it as a barometer of sorts. If you look at your general ledger or trial balance and the assets don't equal the liabilities plus equity (the debits don't equal the credits), then you know you have a problem that must be resolved prior to having numbers that should be relied upon for any purpose whatsoever. Don't forget... a seemingly innocuous .01¢ descrepancy between the balances can be a bunch of huge mistakes offsetting each other....


Why is it wrong to change subcripts when balancing chemical equation?

When you are balancing known reactants and known products which is always the case when you are asked to "balance" a chemical equation you must not change the subscripts as that changes the reactants or the products to a different chemical compound.


How is equality maintained when solving an equation?

Whatever is done on one side of the equation must be repeated on the other side of the equation to maintain balance and equality.


What is a balance equation that indicate that it is conserved?

The mass of reactants must be equal to the mass of products.


Rearraging the equation?

When rearranging an equation whatever is done on its right hand side must be repeated on its left hand side in order to keep the equation in balance.


How many entries are needed for each accounting transaction?

There must be always a 'Credit' whenever there is a 'Debit' so there must be 2.


What if Trial balance debits and credit equals?

If you do a Trial Balance and your Credits Equal your Debits, then more than likely your books are correct.In double entry accounting the debits and credits must balance or be equal.


How do you find the moles recquired?

In order to find the number of MOLES, you must find the relation to said MOLES. Always remember to balance the equation to determine the coefficients. That would be in order to find the relation between them.