What is Accounting Equation | Example

Accounting Equation Feature Image

What is Accounting Equation:

Accounting Equation is a basis of double entry system of accounting. Double entry system means every business transaction has two aspects one is the Debit and another is the Credit. Example: – If we want to buy something like coke, pizza or burger we have to pay cash for these items, So in this transaction, we are receiving food and paying cash means we are doing two job that is why it is called a double entry system. In double entry system, every Debit has an equal amount of the Credit Because

The Business can only receive cash or asset from two sources one is an owner and another one is the third party. When it received from an owner this is called Capital and when from third parties then it is called liabilities.

So, Accounting Equation is Cash or Assets is always Equal to Capital plus Liabilities of the business. 

Assets = Liabilities + Capital

The amount received from the owner: –

is called Capital in the sole proprietorship, 

and it is called shareholder’s funds in the limited company,

Assets = Liabilities + Shareholder’s funds

Performa of Accounting Equation shown below: –

S. No. 

Transaction 

Assets 

Capital 

Liabilities 

 Name of Assets  Name of Liabilities
1.  1st Transaction Amount Amount Amount
Total Amount  Total  Total  Total 
2. 2nd Transaction Amount Amount Amount
Total Amount  Total  Total  Total 
and So On…..

Illustration: –

We are dividing transaction of accounting equation transaction into following categories: –

1st: – Capital to Asset 

When owner investing something into the business it will be in cash or in kind then treatment is:

add the total amount of investment in Capital Column and also in Assets Column.

Example: Mrs Ramanjit started the business with cash Rs 10,00,000/- and land & building Rs 50,00,000/-

2nd: – Liabilities to Asset 

When taking a loan from the financial institution then treatment is:

add the total amount of loan in Liability Column and also in Assets Column.

Example: Loan Taken from HDFC Bank Ltd of Rs 20,00,000/- for the purchase of various assets.

3rd: – Assets to Asset 

When we have purchased an asset for cash(cash is also an asset) then treatment is:

add the total value of an asset purchased in the assets column with the different name of assets and less from the cash (from assets side)

Example: Furniture purchase for Rs 5,00,000/- and  Stock of Rs 15,00,000 cash paid.

4th: – Payment of Expenses

When we have to pay expenses then treatment is:

The amount of expense will be subtracted from cash and also from the capital.

Example: – Salary of Rs 50,000/- paid to employees

5th: – Receipt of Income

When we have received an amount of income then treatment is:

The amount of income will be added to cash or an asset and also into the capital.

Example: – Commission received for Rs 40,000/-

6th: – Profit or Loss 

When we get profit or loss from the sale of goods then its treatment is:

The total sale price of goods or and assets will be added in cash if payment received and in debtors if sold on the credit basis.

and the total cost price of goods or any other assets will be subtracted from the stock or particular asset’s account.

and after that profit or loss will be added or subtracted from the capital.

Example: – Sold goods of Rs 50,000/- for Rs 60,000/- for cash. (in this transaction sale price less costing = Profit/loss(income/loss))

S. No. 

Transaction 

Assets

Capital 

Liabilities 

Cash +Land & Building+Funiture + Stock  Bank Loan
1. Mrs Ramanjit started the business with cash Rs 10,00,000/- and land & building Rs 50,00,000/- 10,00,000 + 50,00,000 60,00,000
Total 10,00,000 + 50,00,000 60,00,000
2. Loan Taken from HDFC Bank Ltd of Rs 20,00,000/- for the purchase of various assets. +20,00,000 +    – 20,00,000
Total 30,00,000 + 50,00,000 60,00,000 20,00,000
3. Furniture purchase for Rs 5,00,000/- and  Stock of Rs 15,00,000 cash paid.  -20,00,000+         –         + 5,00,000 + 15,00,000  –  –
Total 10,00,000 + 50,00,000  + 5,00,000 + 15,00,000 60,00,000 20,00,000
4. Salary of Rs 50,000/- paid to employees     -50,000  +         –         +         –      +        –    – 50,000         –
Total    9,50,000 +50,00,000  + 5,00,000 + 15,00,000 59.50,000 20,00,000
5. Commission received for Rs 40,000/-   +  40,000 +         –         +         –      +        –   + 40,000
Total    9,90,000 +50,00,000  + 5,00,000 + 15,00,000 59.90,000 20,00,000
6. Sold goods of Rs 50,000/- for Rs 60,000/- for cash.     +60,000 +         –         +        –        –      50,000    +10,000         –
Total  10,50,000  +50,00,000  + 5,00,000 + 14,50,000 60,00,000 20,00,000

 

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