The accounting equation shows the equality or relationship between
company assets, liabilities, and capital or owner’s equity. This article
attempts to explain how an accounting equation evolves due to the complex
behaviors of managers in decision-making making specifically capital structure
decisions. The article looks at the accounting equation by using trade-off
theory and positive accounting theory lenses. The accounting equation is viewed
as living or dynamic and changes according to human behavior or managers of a
company’s behavior. The article focuses on all 15 companies listed on the Dar
Salaam Stock Exchange (DSE) from the year 2005 to 2008 when Tanzania
effectively adopted IASs. Annual reports of companies were used to obtain data
from 2005 through 2008. The values of total assets, liabilities, and owners’
equity or capital were obtained from the companies’ statements of financial
position and regressed together. The regression model and descriptive
statistics were used to show the relationship between total assets,
liabilities, and owners’ equity. The model was then used to show a new form of
the accounting equation, rates of change of liabilities, and owners’ equity. In
this article, the new approaches or look at the accounting equation and the
rates of change of liabilities and capital in relation to assets were found and
shows the proportion of the two components of assets i.e. liability 64% and
capital 36% to the asset. Finally, the author explains the constant term which
is not explained by other authors of the accounting field. This article shows
for the first time a new form of accounting equation, different rates of change
for the two components of assets, and finally proportions of the owners’
equity/ capital and liabilities components on assets. Future researchers should
find out how the accounting equation evolves, how total liabilities of
companies (L) and companies’ owners’ equity (C) change in relation to total
assets as well as the proportion of L and C to the total assets in specific
industries and should also define the optimal point where capital equals to
liability.
Author(s)
Details
Ntui
Ponsian Prot
St. Augustine University of Tanzania, Mwanza, Tanzania.
Please see the book here:- https://doi.org/10.9734/bpi/bmerp/v2/2980G
