Benefits of accounting equation
Published By FAREED SIDDIQUI on 2013-02-26 646 Views
The accounting equation is of great help and assistance to accounting professionals. There are several benefits of basic accounting equation. The basic accounting equation, Assets = Liabilities + Capital, is also called as balance sheet equation that aids greatly in the whole process of accounting. It is based on double entry book keeping system which entails balancing the equation. Accounting equation enables accountants to maintain the accuracy in the accounting practice offering various benefits. Here are mentioned some of the important benefits of accounting equation.
There are times when accountants need to pass the adjustment financial entries. In such events, they find the use of accounting equation is very much helpful, as it allows them to maintain the efficiency by determining the debits and the corresponding credits of business transactions. In addition, many a time or sometimes, the need for reclassifying the entries arises, the accounting equation serves as a valuable tool to reclassify or to make reversal financial entries. In this way, the basic accounting equation enables to rectify the errors conveniently.
One of the best advantages of accounting equation is that it enables to find out the third component of the equation, if two of them are given. For example, if the figure of assets and liabilities are given, then the figure of capital can be determined easily. As any equation shows that Left hand side equals to right hand side, the figures pertaining to either sides can be ascertained easily if two things are given.
Accounting equation facilitates to control the whole process of accounting showing the impact of each and every transaction on owner's equity, liability and assets. One of the extremely important benefits of accounting equation is that it helps to ascertain the success or failure of a business. For instance, if owners’ equity increases, it indicates the success of a business and vice versa. If the equation is used in such a manner as to present all the accounts pertaining to the components, it enables to calculate various financial ratios efficiently showing their relationships between the components of financial statements.
K.A.Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Vba/Vb Developer
BBA; MBA-Finance; M.Phil-Financial Management; (PhD-Management)
Individual Member of Institute of Management Consultants of India
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