What is a Accounting Equation?

What is a Accounting Equation?

Meaning of Accounting Equation
Accounting equation is another from of dual aspect concept. It is based on double-entry system of book keeping. According to this concept, it is assumed that every business transaction has two aspects or it affects two parties. For example, when sale of good is affected, cash is received and the goods are delivered out of stock this transaction will record an increase in cash in hand and decrease in stock of goods. Two aspects of this transaction would be cash and goods. Entries for this will be recorded in both of these accounts. Since two separate entries are recorded in two separate accounts, therefore, it is called double entry systems. In other words, we can say that under this system every business transaction has two aspects a debit aspect and a credit aspect. Every debit has a corresponding credit and the total of all debits equals the total of all credits.

Every business transaction effects the financial position of the business in two aspects or that it affect two parties. For example, if ram started business with Rs. 25,000, then this transaction will be recorded at two place one in asset account and the other in capital account. According capital of the business is equal to the assets of the business i.e. Capital= Assets.

Computation of Accounting Equation
Every business transactions has three basic elements i.e. assets, liabilities and capital. The relationship between these three, as mentioned above in the form of accounting equation remains unaltered. It is a mathematical truth that no business transaction can upsets the relationship between these items. An increase in assets side will inevitably lead to increase in liabilities side. Likewise decrease in assets will result in liabilities. Change on the same in corresponding change as under:
• An increase in assets side with corresponding increase in capital.
• An increase in asses with corresponding increase in liabilities
• An increase and decrease in assets.
• An decrease in assets with corresponding decrease in liabilities.
• An decrease in assets with corresponding decrease in capital.
• An increase and decrease in liabilities.
• An increase and decrease in capital.
• An increase in capital and decease in liabilities.
• An increase in liabilities and decrease in capital.
Effect in Accounting Equation
transactions assets Capital + liabilities
1. Started a business with cash Increase + Increase +
2. Purchase goods/ assets for cash Increase +
Decrease - 0 0
3. Sold goods/ assets for cash Increase +
Decrease - 0 0
4. Purchase goods on credit increase 0 + Increase
5. Sold good in profit Increase
Decrease

6. Sold good in profit Increase
(sales price)
Decrease (cost price) Decrease
(profit)
7. Sold good in loss Increase (sales price)
Decrease (cost price) Decrease
(loss)
8. Cash deposited into bank Increase
decrease
9. Cash withdrew from bank for official use. Increase
decrease
10. Cash withdrew from bank for personal use decrease decrease
11. Paid rent decrease Decrease
12. Interest received increase Increase
13. Salary paid including advance Decrease
( full amount)
Increase (advance) Decrease
(actual expenditure)
14. Prepaid expenses Increase
Decrease


15. Outstanding expanses decrease Increase
16. Rent received including Increase
( whole amount) Increase
(actual income) Increase
( liabilities)
17. Gods destroyed by file ( not admitted) decrease decrease
18. Goods destroyed by fire and insurance company fully admitted) Increase
(decrease)
19. Goods destroyed by fire and insurance company partially admitted) Increase
(admitted)
Decrease
(whole amount) Decrease ( not admitted value)