Accounting Equation: The accounting equation states that Assets = Liabilities + Shareholders’ Equity. It must always balance.

The names of financial statements related to assets, liabilities, and shareholders’ equity:

1. Assets:

   • Definition: Assets are anything valuable that a company owns. They represent economic resources that provide future benefits.
   • Categories/Types:
     • Current Assets: Cash and assets that can be converted into cash within a year (e.g., inventory, accounts receivable).
     • Fixed Assets (Non-Current Assets): Long-term assets like land, buildings, machinery, and trademarks.
   • Formula: Total Assets = Current Assets + Fixed Assets.
   • Statement: Assets are listed on the balance sheet.

2. Liabilities:

   • Definition: Liabilities are debts or obligations that a company owes to others. They represent claims against the company’s assets.
   • Categories/Types:
     • Current Liabilities: Debts due within the next 12 months (e.g., accounts payable, short-term loans).
     • Non-Current Liabilities: Long-term debts (e.g., long-term loans, bonds).
   • Formula: Total Liabilities = Current Liabilities + Non-Current Liabilities.
   • Statement: Liabilities are also listed on the balance sheet.

3. Shareholders’ Equity:

   • Definition: Shareholders’ equity represents the residual interest in a company after deducting liabilities from assets. It’s the net worth of the business.
   • Formula: Shareholders’ Equity = Total Assets – Total Liabilities.
   • Statement: Shareholders’ equity is reported on the balance sheet as either “Owners’ Equity” (for sole proprietorships or partnerships) or “Shareholders’ Equity” (for corporations).

In summary:

• Assets: What a company owns.
• Liabilities: What a company owes.
• Shareholders’ Equity: What’s left over for shareholders after deducting liabilities.

These concepts are fundamental for understanding a company’s financial health and are crucial for financial reporting.