The assets of the firm belong to the resource providers, i.e., owners, creditors or lenders who have claims on the assets.
Therefore: Assets and claims form the backbone of a company.
In accountancy it is important to show their relationship? BUT HOW?
The accounting equation is a mathematical expression of the relationship between assets of the firm and claims represented by liabilities and owner’s equity or the owner’s personal stake in the firm.
The basic accounting equation states that assets equal liabilities plus owner’s equity.
In its simplest form the accounting equation is represented as:
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