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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
‘Cash withdrawn by the proprietor from the business for his personal use’ causes ____________.
A firm has assets of ₹ 1,00,000 and the external liabilities of ₹ 60,000. Its capital would be ___________.
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?
Classify the accounts with suitable examples.
Complete the accounting equation.
Assets = Capital + Liabilities
₹ 1,00,000 = ₹ 80,000 + ?
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- Money withdrawn from bank for office use - ₹ 1,000
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)
Create an accounting equation on the basis of the following transactions:
- Started business with cash ₹ 80,000 and goods ₹ 75,000
- Sold goods to Shanmugam on credit for ₹ 50,000
- Received cash from Shanmugam in full settlement ₹ 49,000
- Salary outstanding ₹ 3,000
- Goods costing ₹ 1,000 given as charity
- Insurance premium paid ₹ 3000
- Out of insurance premium paid, prepaid is ₹ 500
