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Accounting Equation

The accounting equation states that assets must equal the sum of liabilities and equity. It represents the fundamental balance that the resources (assets) of a business are financed by claims on those resources through either debts (liabilities) or ownership (equity). The accounting equation is expressed as Assets = Liabilities + Equity and must remain in balance whenever a transaction occurs by adjusting at least one side of the equation. Nine basic types of transactions are provided that can increase, decrease, or both increase and decrease elements of the accounting equation.

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54 views4 pages

Accounting Equation

The accounting equation states that assets must equal the sum of liabilities and equity. It represents the fundamental balance that the resources (assets) of a business are financed by claims on those resources through either debts (liabilities) or ownership (equity). The accounting equation is expressed as Assets = Liabilities + Equity and must remain in balance whenever a transaction occurs by adjusting at least one side of the equation. Nine basic types of transactions are provided that can increase, decrease, or both increase and decrease elements of the accounting equation.

Uploaded by

Ankur Rastogi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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ACCOUNTING EQUATION

It is the statement of Equality between the Resouces & the souces which finance the resources & is expressed as follows: Resources = Sources of Finance Resources means Assets refer to the Tangible Objects (e.g.Land &Building,Plant&Machinery, Furniture,Investments,Stock,Debtors ,Cash balance ,Cash balance) or intangible rights( Patents, Trademarks ,Copyrights owned by an enterprise and carrying probable future benefits. Sources of finance means equities and includes Internal Sources (or Internal equity)( i.e capital) and External sources (or External Equity) (i.e liabilities)

Steps involved in Developing An Accounting EquationStep 1- Ascertain the variables (i.e ,Assets, Liablities, or Capital) of an equation affected by a transaction. Step2- Find out the effect (in terms of increase or decrease) of a transaction on the variable of an equation. Step3- Show the effect on the appropriate side of an equation and ensure that the total of right hand side is equal to the total of left hand side. The idea behind expressing accounting equation is that business is considered quite different from its proprietor. Whenever a proprietor provides a capital to a business he has a claim over it. It follows from the above statement that whenever an asset comes into business an equal claim arises. The accounting equation has two aspects or two sides, viz., left hand side to record any increase or decrease in the value of asset and right hand side to record any change in the value of liabilities.

Equation: Capital +_ Liabilities =Assets C + L =A The following transaction shows that change in one element results in corresponding change in the same item or in other element. Nine basic transactions are as under:1. Increase in assets with corresponding Increase in capital. 2.Increase in Assets W.C. Increase in Liabilities. 3.Increase and Decrease in assets. 4.Decrease in assets with corresponding decrease in liabilities. 5.Decrease in assets w.c decrease in capital. 6.Increase and decrease in liabilities. 7.Increase and Decrease in capital. 8.Increase in liabilities and decrease in capital. 9. Increase in capital and decrease in liabilities.

Illus.Show the Accounting Equation on the basis of the following transactions: Manu started business with Cash 50,000 2. Purchased goods on credit 4000 3. Purchased goods for cash 1000 4. Purchased furniture 500 5. Paid rent 200 6. Withdraw for private use 700 7. Received Interest 100 8.Sold goods on credit (cost Rs.500) for 700 9. Paid to creditors 400 10. Paid salaries 200
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