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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
A firm has assets of ₹ 1,00,000 and the external liabilities of ₹ 60,000. Its capital would be ___________.
Real account deals with ____________.
Prepaid rent is a ____________.
Write any one transaction which decreases the assets and decreases the liabilities
Write any one transaction which increases one asset and decreases another asset
What is an Account?
Classify the accounts with suitable examples.
Complete the accounting equation.
Assets = Capital + Creditors
? = ₹ 1, 60,000 + ₹ 80,000
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)
