Every accounting calculation carries a reflection of the accounting equation. What is the accounting equation? Why does it carry so much importance? The accounting system defines the basic logic implemented in every function of this field. According to this equation, the value of total assets is equal to the sum of liabilities and capital. The assets represent left side of the equation while the liabilities and capital are written on the right side. The assets include all the resources used to get the end product. Some examples are machines, buildings and cash. A liability is anything which the organization gets on credit and has to pay the respective cost on a certain date. Similarly, capital is the entire amount invested in the business to earn profit.
If all the entries of the company are correct, the left side of the accounting equation should be equal to the right side. Students who are working on their accounting research papers need to get a firm grip of this equation. If you are using actual data of an organization in your paper, check the values by using the accounting equation.
This equation does not change with the system of accounting. In other words, every accounting standard works according to the same equation. Basically, the three classification of accounts used in this equation are assets, liabilities and capital. However, when the financial statements are made, several classifications of each account type are included. For instance, long term bonds, account payable and note payable are some liability types.