PART I
According to Hemming, Allen, & Potter (2013), the accounting equation is always true in all the cases. It is the founding principle of all accounting transactions. Assets are the things that one has; they may be inventory, cash and equipment used in running business. Liabilities are the things the business owes other people, while the owner’s equity is what is left after the business has clearing all liabilities. An example showing that the accounting equation is always correct is that, if one buys a car worth $40,000 after borrowing $20,000, then the owner’s equity will be $20,000. This is because total value of the asset (car) is $40,000; however, the owner owes the lender $20,000, which is a liability. Therefore, Assets ($40,000) = Liabilities ($20,000) + Owner’s equity ($20,000), an indication that the accounting equation is always true.
PART 2
The term account means the ability to take responsibility for a certain action. The responsibility should be proportionate to the action taken. And that is the basis for the account equation as displayed by balancing of the balance sheet where assets are on the left side and liabilities, along with Assets on the right side. There major types of accounts are nominal accounts, personal accounts, and real accounts. Personal accounts are accounts that are kept in respect to an individual or an institution, as example is a saving bank account, nominal accounts are accounts that are kept in respect to expenses and income, such as commission and rent, while real accounts are account kept for assets that tangible, such as buildings and machinery among others. Debits and credits are crucial parts of accounting because they enable the balance sheet to balance (Porter & Norton, 2008, p. 116). For example when a business buys inventory, inventory will go on the debit side of the balance sheet, while the cash spent to buy the inventory will go on the credit side of the balance sheet.
References
Hemming, R., Allen, R., & Potter, B. (2013). The international handbook of public financial management. New York : Palgrave Macmillan.
Porter, G. & Norton, C. (2008). Financial Accounting: The Impact on Decision Makers. NY: Cengage Learning.
