The Accounting Equation

The resources controlled by a business are referred to as its assets. For a new business, those assets originate from two possible sources:

* Investors who buy ownership in the business
* Creditors who extend loans to the business

Those who contribute assets to a business have legal claims on those assets. Since the total assets of the business are equal to the sum of the assets contributed by investors and the assets contributed by creditors, the following relationship holds and is referred to as the accounting equation :

Assets = Liabilities + Owners' Equity
Resources Claims on the Resources

Accounting equation is a statement of equality between the debit and credit showing that the assets of a business are always equal to the total of liability and capital.

Example :- (1)Started business with capital INR 1,50,000/-
Assets = capital/cash 1,50,000/- = capital 1,50,000/-
(2)Purchases goods on credit 50,000/-
(a)Assets = Liability + Capital
Cash 1,50,000/- + Stock 50,000/- = Capital 1,50,000/-
(b)Liability = Assets - Capital
Liability50,000 = (cash1,50,000+stock50,000)-Capital1,50,000
(c)Capital=Assets-Laibility
Capital1,50,000=(Cash1,50,000+Stock50,000)-Liability50,000
(d)Assets-Capital-Liability=0
(Cash1,50,000=Stock50,000)-Capital 1,50,000-Liability 50,000=0