Accounting Equation

The accounting equation is a fundamental concept in accounting that represents the relationship between a company's assets, liabilities, and owner's equity. It is expressed as follows:

Assets = Liabilities + Owner's Equity

This equation demonstrates how a company's resources (assets) are financed by either borrowed funds (liabilities) or the owner's investment (owner's equity). In simple terms, it shows that a company's assets must be equal to the sum of its liabilities and owner's equity.

Explanation of the Accounting Equation:

1. Assets:
Assets are the economic resources owned or controlled by a company. They can be tangible, such as cash, inventory, or property, or intangible, such as patents or copyrights. In this scenario, the cash brought to start the business - $45,000 - would be considered an asset.

2. Liabilities:
Liabilities represent the company's obligations or debts to external parties. These can include loans, accounts payable, or other outstanding payments. However, since no liabilities are mentioned in this scenario, we can assume that there are no initial liabilities.

3. Owner's Equity:
Owner's equity refers to the owner's investment or the residual interest in the assets of the company after deducting liabilities. It represents the owner's claim on the company's assets. In this case, the $45,000 in cash brought to start the business would be considered the owner's equity.

Accounting Equation with the Given Information:

Assets = Liabilities + Owner's Equity

Since no liabilities are mentioned, the equation can be simplified to:

Assets = Owner's Equity

Given that $45,000 in cash is brought to start the business, we can represent the accounting equation as follows:

Assets ($45,000) = Owner's Equity ($45,000)

This equation shows that the initial investment of $45,000 in cash becomes the owner's equity and is equal to the company's assets. It provides a basis for recording and tracking financial transactions, ensuring that the equation remains in balance throughout the accounting period. As the business progresses, additional transactions will affect the equation, reflecting changes in assets, liabilities, and owner's equity.