The Relationship of Assets with Liabilities and Capital or Owners Equity: Evidence of Companies Listed on Dar es Salaam Stock Exchange, Tanzania

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.