KSHITIJ EDUCATION

Specialized Institute for Mathematics, Computer Science & Commerce

9810860991, 9910061580, 47008740
Accountancy : Class – 11 – Accounting Equation K
S
Accounting Equation
H

Accounting equation signifies that the assets of a business are always I

equal to the total of its liabilities and capital (owner’s equity).
The equation reads as follows: T
A=L+C
Where, I
A = Assets (Resources of Business)
L = Liabilities (Obligation towards outsiders) J
C = Capital (Obligation towards owner)
The above equation can be written as
(i) A – L = C
(ii) A – C = L E
The accounting equation depicts the fundamental relationship among
the components of the Balance Sheet. Therefore it is also called the D
Balance Sheet Equation.
What is Balance Sheet? U
Balance sheet is a statement of assets, liabilities and capital at any
point of time. (On a particular day)
C

At any point of time resources of the business entity (called Assets)

A
must be equal to the claims of those who have financed these
resources ( Capital and Liabilities).
T
The resources of business are provided by the proprietors (owner) and
outsiders provide the resources of the business.
I
The claim of the proprietors is called capital.
The claim of outsiders is known as liabilities.
O
Each element of the accounting equation is the part of balance sheet.
N
While analysing transactions using accounting equation, we actually
try to know how Balance Sheet of a business entity gets affected.

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 KSHITIJ EDUCATION
Specialized Institute for Mathematics, Computer Science & Commerce
9810860991, 9910061580, 47008740
Accountancy : Class – 11 – Accounting Equation K
Rules of Accounting Equation. S
1. Accounting Equation records changes in Assets, Liabilities
and Capital. H
2. If any asset is bought it is shown under a column bearing its
name in accounting equation. I
3. If any liability is incurred it is shown under a column bearing
its name in accounting equation. T
4. A separate column is kept for capital.
5. Goods purchased are shown under the column of stock(asset) I
6. When goods are sold, the cost of goods sold is subtracted from
the column of stock and profits/losses are added/subtracted to J
capital and cash received will be added to cash.
7. There will be no column for expense/gain/profits/losses.
8. All losses/expenses/drawings are subtracted from capital.
9. All profits/gains are added to capital. E
10. Interest on Capital is added and subtracted from capital.
11. Interest on drawings is added and subtracted from capital. D
12. After each transaction each column is totalled to check the
accounting equation. U
After solving the question the final result can be shown in T-form C
statement called Balance Sheet.
A
Balance Sheet as on …….
Liabilities & Capital Amt. Assets Amt. T
Capital .
. . I
. .
. . O
Total Total
N

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 KSHITIJ EDUCATION
Specialized Institute for Mathematics, Computer Science & Commerce
9810860991, 9910061580, 47008740
Accountancy : Class – 11 – Accounting Equation K
Hints S
1. Expense incurred
a. its amount will be subtracted from capital H
b. If payment is made by cash then cash will be decreased.
c. If payment is yet to be made then a new liability of I
expense outstanding is created.
2. Expense is paid in advance T
a. The cash will be decreased
b. a new asset of prepaid expense will be created. I
3. Revenue is recognised
a. its profit will be added from capital J
b. If payment is received then cash will be increased.
c. If payment is yet to be received then a new asset of
accrued income is created.
4. Revenue is received in advance E
a. The cash will be increased
b. a new liability of revenue received in advance will be D
created.
5. Sales is made U
a. The stock will subtracted equal to the cost of goods sold.
b. The profits on sales will added to capital & losses on sales C
will be subtracted from capital.
c. Cash/bank received on this transaction will be added to A
cash/bank.
d. If any payment is yet to be made that amount will be T
added under debtor column.
6. Drawings I
a. Subtracted from capital.
b. If drawings are made by cash/bank, cash/bank will be O
decreased.
c. If drawings are made out of goods, stock will be N
decreased.
d. If drawings are made out of any other asset, the value of
that asset will be reduced.

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