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Question
What is the accounting equation?
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Solution
The accounting equation shows the relationship between assets, liabilities, and capital. It is based on the dual aspect concept of accounting, which means that every business transaction has two effects. The equation is expressed as:
Assets = Liabilities + Capital
or
Capital = Assets − Liabilities
This equation indicates that the total assets of a business are always equal to the combined claims of outsiders (liabilities) and the owner (capital).
In a balance sheet, the total of the assets side and the total of the liabilities side are always equal. Every transaction increases or decreases one side of the equation, but an equal effect is also made on the other side, thereby maintaining equality at all times.
RELATED QUESTIONS
Accounting equation signifies ___________.
Which one of the following is representative personal account?
Write any one transaction which increases one asset and decreases another asset
How are personal accounts classified?
Write a brief note on accounting equation approach of recording transactions.
Classify the accounts with suitable examples.
What are the three different types of personal accounts?
For the following transactions, show the effect on the accounting equation.
- Raj started business with cash - ₹ 40,000
- Opened bank account with a deposit of - ₹ 30,000
- Bought goods from Hari on credit for - ₹ 12,000
- Raj withdrew cash for personal use - ₹ 1,000
- Bought furniture by using debit card for - ₹ 10,000
- Sold goods to Murugan and cash received - ₹ 6,000
- Money withdrawn from bank for office use - ₹ 1,000
Prepare accounting equation for the following transactions.
- Murugan commenced business with cash ₹ 80,000
- Purchased goods for cash ₹ 30,000
- Paid salaries by cash ₹ 5,000
- Bought goods from Kumar for ₹ 5,000 and deposited the money in CDM.
- Introduced additional capital of ₹ 10,000
What will be the effect of the following on the accounting equation?
- Sunil started business with ₹ 1,40,000 cash and goods worth ₹ 60,000
- Purchased furniture worth ₹ 20,000 by cash
- Depreciation on furniture ₹ 800
- Deposited into bank ₹ 40,000
- Paid electricity charges through net banking ₹ 500
- Sold goods to Ravi costing ₹ 10,000 for ₹ 15,000
- Goods returned by Ravi ₹ 7,500 (costing ₹ 5,000)
