Financial statement tell us how a business is performing. They are the final product of all accounting process. But how do we arrive at the items and amounts that make up the financial statements? The most basic tool of accounting is the accounting accounting equation. This equation presents the resources controlled by the enterprise , the present obligation of the enterprises and the residual interest in the assets. It state that the assets must always to equal liability and owners equity. The basis accounting model is :
Assets = Liabilities + Owners Equity
Note that the assets are on the left side of the equation, opposite the liabilities and owners equity. This explain why increase and decrease in asset are recorded in the opposite manner as liabilities and owners equity are recorded. This equation also explain why liabilities and owners equity follow the same rules of debit and credit. the logic of debiting and crediting is related to accounting equation.
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