ACCOUNTING EQUATION• DEFINITION:-• “For every debit , there is a credit”• The basic accounting equation is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. ASSETS=LIABILITIES+CAPITAL A = L +C• 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 :
IMPORTANCE OF ACCOUNTINGEQUATION• Financial Statements• A company’s quarterly and annual reports are, in essence, derived directly from the accounting equations used in bookkeeping practices. These equations, entered in a business’s general ledger, will provide the material that eventually makes up the foundation of a business’s financial statements. This includes expense reports, cash flow, interest and loan payments, salaries, and company investments.
• Double Entry Bookkeeping System• The importance of the accounting equation also lies in its status as the foundation of the double entry bookkeeping system. This accounting system ensures that a company’s accounts are always balanced and that all financial transactions are documented in detail
• Investment Importance• Due to its role in determining a firm’s net worth, the accounting equation is also an incredibly important tool for investors. The equation can illuminate a company’s holdings and debts at any particular time, and frequent calculations can indicate how steady or erratic a business’s financial dealings might be.• Double Entry Bookkeeping System• The importance of the accounting equation also lies in its status as the foundation of the double entry bookkeeping system. This accounting system ensures that a company’s accounts are always balanced and that all financial transactions are documented in detail
• Income and Retained Earnings• Use of the accounting equation is also an essential component in computing, understanding, and analyzing a firm’s income statement. This statement reflects profits and losses that are themselves determined by the calculations that make up the basic accounting equation• Company Worth• Because the balance sheet is founded on the principles of the accounting equation (a formula which likewise allows accountants to compile and analyze the details on this sheet), this equation can also be said to be responsible for estimating the net worth of an entire company.
Business transactions• 1st Sep Investment by Owner of Rs.400,000• 2nd Sep purchased of building of 180,000,paid 120,000 at the spot and rest were notes payable• 3rd Sep Purchased furniture of Rs.160,000 out of which paid 60,000 rest were accounts payable• 4th Sep purchased stationary for 40,000 paid 30000 while 10000 were to be paid later on.• 5th Sep Purchased land of Rs.140000 out of which 100000 were paid and 40000 were accounts payable• 6th Sep Received bank loan of Rs.400,000
• 12th Sep Purchased furniture of Rs.150,000, 50,000 were paid rest were N/P• 14th Sep Purchased Stationary of Rs.100,000, 70,000 were paid in advance and 30,000 were to be paid later on.• 16th Sep Purchased merchandise of Rs.170,000 , 100,000 were paid in advance• 21st Sep Purchased furniture of Rs.240,000 out of which 140,000 were paid and rest were notes payable.• 22nd Sep Sold stationary of Rs.100,000 received 50,000 at the time of transaction while rest were notes payable.• 24th Sep Purchased merchandise for 100,000, 40,000 were paid in advance.• 25th Sep Sold merchandise of Rs.60,000 on credit