Accounting Equation is the straight forward relationship between assets, Liabilities & Capital.

1. ACCOUNTING
EQUATION

2. What is the Accounting Equation?
 It is the basic principle of accounting.
 It shows the straight forward relationship between assets, liabilities & equity.
 It states that company’s total assets are equal to the sum of its liabilities and shareholders
equity.
 Also known as balance sheet equation.
 It is the foundation for double entry book keeping system.

3. Accounting Equation Formula
ASSETS LIABILITIES CAPITAL

4. Derived Equations
CAPITAL ASSETS LIABILITIES
LIABILITIES ASSETS CAPITAL

5. Understanding the Accounting Equation
◦ Represents how Assets, Liabilities & Capital are associated which
each other.
◦ States that ‘ for every debit, there is a corresponding Credit’.
◦Total amount of assets will always be equal the
sum of liabilities & shareholders' equity.

6. Elements in Accounting Equation
Assets:
Material things, possessions or properties of business. It includes
Physical or real properties called tangible assets, right in certain assets
called intangible assets & amount due to the business from others.
Assets may be classified into Fixed Assets & Current Assets

7. Fixed Assets
◦ Acquired for relatively longer periods
◦ Not meant for resale
◦ Helps in generating income
◦ Eg: Machinery, Land, Building, etc.

8. Current Assets
◦ Held for short period, usually less than one year.
◦ Acquired with the intention of converting them into cash or
consumed during the normal operating business cycle.
◦ Also called Floating / Circulating Assets.
◦ Eg: Debtors, Stock in hand, etc.

9. Liabilities
◦ Obligations or debts of the organization.
◦ Amount of money payable to others.
◦ Its also called as creditors equity.
Liabilities may be classified into Long term Liabilities & Short term
liabilities.

10. Long-term Liabilities
◦ Payable after a long period (usually more the one year).
◦ Eg: Debentures, Long-term Loans, etc.
Short-term Liabilities
o Payable with in a period of one year.
o Eg: Bills Payable, Outstanding Expenses, etc.

11. Capital
◦Investment made by owners.
◦May be in the form of cash / assets
◦Also termed as net worth / owners equity.