ACCOUNTING EQUATION
It’s the fundamental tools of any business to check the final position of business.
Its show the true and fair pitcher of business. The accounting equation must be balanced. The
increase in assets side of the accounting equation show good position of business as compare
to increase in liability side of business equation.
ASSETS = LIABILITIES = CAPITAL
RESOURCES = SOURCES
ASSETS = CLAIM AGAINTS ASSET
The increase in assets side of the accounting equation show good position of business as
compare to increase in liability side of business equation.
ASSETS = LIABILITIES+OWNER EQUITY
The chance in assets occurred when the uses of assets changed but the total of assets remain
same. Expenses cash used to purchase furniture. The composition changed but the total
remains same. Accounting equation is a mathematical expression which show that the assets
and liabilities of the business which are equal. Accounting equation is based on the dual
aspect concept of accounting meaning because every transaction has two aspect debit and
credit. Accounting equation base on single entry concepts. On every business transaction for
every debit there is an equivalent credit.
ASSETS=CLAIM AGAINTS ASSETS.
The three basic elements of accounting are assets, liabilities and capital. The assets represent
the things of value that business ownes.The liabilities are the claims of the creditors against
those assets. The owner equity is the claim of the owner against those assets.
The claim has two types
1. Owner equity=internal liabilities
2. Creditors/debts =outside liabilities
The relationship between is presented in accounting equation form such as:
Assets=equities (claims)
Assets=liabilities +capital
The clear understanding of the accounting equation is very essential because most of the
accounting system based on it. The equation actually identifies the claim against the assets
held by a business. The two sides represent different version of the same things. The lift side
of the accounting equation, assets, consists of the resources (properties) held by the business.
The right side of the accounting equation, equities (creditor’s claim and owner equity claim
against assets) consist of the sources.
NATURE OF ACCOUNTING EQUATION
The accounting equation always hold two changes in transaction that’s why it’s
based on dual concept of accounting. The transaction may be sheet both side of equation
same or different amount its sometime decrease or increase both side by same amount.
Transaction effect accounting equation. Transaction affecting two items.
1. Transactions that are recorded on both opposite side of accounting equation.
Transaction affecting two items such as Increase in assets, decrease in liabilities
Credit Purchase
Decrease in liability, decrease in assets
Cash paid to credit
Decrease cash, decrease liabilities
Salary paid
Decrease in cash, decrease in capital
2. Transaction affecting same side but in opposite direction
Transaction affecting two items such as Increase in assets decreases in other assets.
Cash Deposit In To Bank
Decrease in liability, decrease in another liability.
Issue of bill of exchange
Decrease credit (liability), increase bill payable (liability)
PROCEDURE TO PREPARE ACCOUNTING EQUATION
Analyze the transaction in following variables such as assets, liabilities, capital.....etc.
Decide the effect of transaction in term of decrease on increase in variable. All these
transactions are record effect on relevant side of equation.
ILLUSTRATION
Started business with cash Rs. 100,000.He purchased goods Rs.10, 000.
Assets = Liabilities +Owner equity
Cash + Goods = Liabilities +Owner equity
100,000 = +100,000
(10,000) +10,000 =
90,000 +10,000 = Nill +100,000
100,000 = 100,000
Resources = Sources
It must be remembered that the both side of accounting equation equal because two sides are
merely two views of the same business resources. The assets side shows us “What resources
“the business owns, the other side (liabilities and owner’s equity) tell us “who supplied these
resources to the business and how much each group supplied.
