Accounting Equation

•    Accounting equation signifies that the assets of a business are always equal to the total of capital and liabilities, i.e., Assets = Liabilities + Capital.
•    Accounting equation is based on the dual aspect concept of accounting meaning, every transaction has two aspects-debit and credit.
•    A transaction may affect either both sides of the equation by the same amount or one side of the equation only, by either increasing or decreasing it by equal amounts. If a business transaction results in the increase of assets, there will also be a corresponding increase in the amount of either capital or liabilities by the same amount.
•    Total Assets are equal to Capital plus Liabilities, Capital is equal to Total Assets minus Liabilities, Profit is equal to Closing Capital minus Opening Capitaletc.
•    Various steps to be followed while preparing accountingequation. Firstly, ascertain the variables (assets, liabilities or capital) affected by the transaction. Then, find out its effect (increase or decrease) on assets, liabilities or capital. Next, show the effect on the appropriate side. Lastly, ensure that Assets = Liabilities + Capital.
•    Every business has the sources from where the funds come into the business. Sources of Funds include ‘Capital and Liabilities’.
•    Application of Funds refers to funds applied in the business for different purposes after procurement. It involves purchase of assets.
•    Balance Sheet is the statement of Assets, Liabilities and Capital. Left hand side records sources of funds, while right hand side records application of funds.

 

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