Accounting Equation

What is Accounting Equation

It’s the fundamental tools of any business to check the final position of the business. It shows the true and fair pitcher of business. The accounting equation must be balanced. The increase in assets side of the accounting equation shows the good position of the business as compared to the increase in the liability side of the business equation.

ASSETS = LIABILITIES = CAPITAL

RESOURCES = SOURCES

ASSETS = CLAIM AGAINST ASSET

The increase in assets side of the accounting equation shows the good position of the business as compared to the increase in the liability side of the 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 the same. The accounting equation is a mathematical expression which shows that the assets and liabilities of the business which are equal. The 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 AGAINST ASSETS.

The three basic elements of accounting are assets, liabilities, and capital. The assets represent the things of value that business owners. 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 the accounting equation form such as:

  •  Assets=equities (claims)
  •  Assets=liabilities +capital

A 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 a 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 holds two changes in the transaction that’s why it’s based on the dual concept of accounting. The transaction may be sheet both side of equation same or different amount it’s sometimes decreasing or increase both sides by the same amount. Transaction effect accounting equation. Transaction affecting two items. Its Part of Accounting Cycle

1. Transactions that are recorded on both opposite side of the 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 the credit: Decrease cash, decrease liabilities

Salary Paid : Decrease in cash, decrease in capital

2. Transaction affecting the same side but in the 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.

The issue of a bills of exchange :Decrease credit (liability), increase bill payable (liability)

 

PROCEDURE TO PREPARE ACCOUNTING EQUATIONS

Analyze the transaction in following variables such as assets, liabilities, capital…..etc. Decide the effect of the transaction in term of decrease on increase in a variable. All these transactions are recorded effect on the relevant side of the 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 both side of the 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.

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