Answer:
The basic accounting equation is,
We can expand this in to,
- Assets = Equity + Liabilities
We can further expand this as,
- Assets = Equity + (Income - Expenses) + Liabilities
Explanation:
initially, since we consider the business as a separate entity from the owner, the assets of the business are equal to the amount the owner contributes.
then when the company can no longer grow only with equity, we take loans from third parties, and assets equals liabilities and equity.
then with business operations, revenues comes in and costs go out, the net result, profit or loss either increase the equity or decrease the equity.
