ACCOUNTIN

G
EQUATION
(Balance Sheet Equation)
ACCOUNTING EQUATION
Accounting equation signifies that the assets of a business are
always equal to the total of Liabilities (outsiders claim) and
capital (owners claim).

Assets = Liabilities + Capital

or

Assets = Equities
 Asset : The properties owned by a business are called assets.
Equities : Total claims against a business are called equities.
Equities may be sub divided into 2 types-The claims of the
outsiders ,i.e., debts of the business is called “liability or
creditors equity.” And the claims of the owners against
business are known as “capital or owners equity”.
Thus, Assets = Creditors Equity + Owners Equity
i.e. , Assets = Liabilities + Capital The
above equation can also be expressed as follows:
Assets – Liabilities = Capital
Assets – Capital =
Liabilities Assets – Liabilities –
 The accounting equation is
often called as Balance Sheet equation
as it shows the
fundamental among
relationship components the Sheet.
equation set theoffoundation
Balance of double-entry
This
accounting and highlights the structure
of the balance sheet.
 The between assets,
liabilities and capital, as
relationship
above the form mentioned of
in accounting
remains unchanged. It has
been a mathematical truth. No business
equation
transaction can break the
relationship between these items.
Process of Preparing
Accounting Equation
Transaction 1 : Rohit started business with a capital of 50,000/.
From the accounting point of view, the resources of
this business entity is in the form of cash, i.e., 50,000/. Sources of
this business entity is the contribution by Rohit (Proprietor)
Capital
50,000 as. If we put this information in the form of
resource equality of and sources,the picture
s follows- would emerge somewhat as
 We will now analyse
transactions listed
the in example 1
and its effect on different
elements and will
that the accounting
you observe
always remain equation
balanced:
Transaction 2 : Business purchased a machine
for Cash 10000/.
This reduces Cash(Current asset) and
increases Fixed Asset (Machine) of business as shown
below-
Transaction 3 : Business purchased goods costing
12000/- for Cash.
This reduces Cash ( Current asset) and
increases another Current Asset (Goods) as shown
below-
Transaction 4 : Business purchased goods for 7600/-
on credit from Suraj
This increases stock of goods & also
create a liability as shown below-
Transaction 5 : Business sells goods for 9600/- on credit to
Rajan , costing 8000/- (Three effects here)
As a result of this transaction, the business makes a profit
1600/- ie, (9600-8000) .This will increase Rohith's Capital. This
transaction create a current asset -Sundry Debtor (Rajan) and
makes a decrease in another Current Asset (Stock).The position of
the business now will be as follows-
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