Unit 6 Reading — The Accounting Equation

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Listen to the audio recording while you read the text below. Then answer the comprehension questions that follow the text.

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The Accounting Equation

Financial accounting is an area which can be explained simply by using the accounting equation, which is assets = liabilities + capital.

But what does that really mean? To understand the significance of the equation, first we must explore the meaning of the three words; assets, liabilities and capital. These terms are often used in accounting but can have very different meanings.

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Discussion Questions

Why might intangible assets be hard to quantify?

Why is the accounting equation so important?

What are the typical assets and liabilities connected to a SME?

Quiz: Reading Comprehension

1. The accounting equation should take intangible assets into consideration.

	True
	False

2. Goodwill and intellectual property are contingent liabilities.

	True
	False

3. Draws are part of the extended accounting equation.

	True
	False

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