Basic Accounting equation In this article you can read Basic Accounting System, Meaning of Accounting equation . some example of Balance Sheet etc.... Meaning of Basic Accounting equation The entire recording of business transactions is based on the 'Accounting Equation' and the accounting equation is based on the 'Dual Aspect Concept' of accounting. According to the bilateral concept, there are two sides to every business transaction and these behavior have equal and opposite effects on both sides. One side is 'Debit' and the other side is 'Credit'. These practices affect the property on the one hand, while on the other they affect the capital and liabilities against the property. As a result, the number of both sides of the letter is the same. If more than two accounts are affected by any transaction or transaction, then even in such a situation the sum of all the accounts on the debit side is equal to the sum of all the accounts on the credit side, the writing of the debit and credit sides of the transaction. can be expressed by the equation. This equation itself is called 'Accounting Equation' in the language of accounting. The meaning of 'equation' in the dictionary is "a statement that two things are equal or the same". Confirms the equality of two expressions, which is added by the sign ' = ' (is equal to ). Therefore the equality of assets on one side and capital and liabilities on the other side is called 'Basic Equation of Accounting'. It is also called as Balance Sheet Equation. In the form of equation it is written as : ( i ) Assets (A) = Liabilities (L) + Capital (C) Or Assets (A) = Equity (E) + Outside Liabilities (O.L. Or Total Assets (A) = Total Equities (Total Claims) (E) Or Asset = External Equities + Internal Equities From the above equation, we also know the following equations: ( ii ) Capital = Assets - Liabilities ( iii ) Liability = Assets - Capital

1. Basic Accounting equation
The term 'Accounting Equation' refers to the equality of assets and liabilities.
According to the accounting equation, the sum of a business's total assets is equal to the
sum of its liabilities and owner's capital.
Meaning of Basic Accounting equation
The entire recording of business transactions is based on the 'Accounting Equation' and the
accounting equation is based on the 'Dual Aspect Concept' of accounting. According to the
bilateral concept, there are two sides to every business transaction and these behavior have
equal and opposite effects on both sides. One side is 'Debit' and the other side is 'Credit'.
These practices affect the property on the one hand, while on the other they affect the capital
and liabilities against the property. As a result, the number of both sides of the letter is the
same. If more than two accounts are affected by any transaction or transaction, then even in
such a situation the sum of all the accounts on the debit side is equal to the sum of all the
accounts on the credit side, the writing of the debit and credit sides of the transaction. can be
expressed by the equation. This equation itself is called 'Accounting Equation' in the
language of accounting.
The meaning of 'equation' in the dictionary is "a statement that two things are equal or the
same". Confirms the equality of two expressions, which is added by the sign ' = ' (is equal to
). Therefore the equality of assets on one side and capital and liabilities on the other side is
called 'Basic Equation of Accounting'. It is also called as Balance Sheet Equation.
In the form of equation it is written as :
( i )
Assets (A) = Liabilities (L) + Capital (C)
Or
Assets (A) = Equity (E) + Outside Liabilities (O.L.
Or
Total Assets (A) = Total Equities (Total Claims) (E)
Or
Asset = External Equities + Internal Equities
From the above equation, we also know the following equations:
( ii )
Capital = Assets - Liabilities
( iii )
Liability = Assets - Capital
Whereas,
(i) Assets mean those resources which are owned by the business and which are expected
to bring profits in future. Assets include both tangible and intangible assets.

2. (ii) Liabilities / Liabilities means those debts which are to be paid to outside parties of the
business. Generally, liability refers to the external nature.
(iii) Capital means the amount payable to the owner/s of the business. It is also called
Owner's Equity.
(iv) Equities mean all types of liabilities of the business. Equities are divided into two
categories - (i) Owner's Equity i.e. Capital, it is called Internal Equity, and (ii) External
Equities or Creditors Equities. is called.
The number of assets held by each business entity, the same are the liabilities or
liabilities (ie capital and liabilities) of that organization. As a result, the total assets of the
organization cannot exceed the total liabilities. If there is an increase or decrease in the total
assets, then the equities or liabilities of the organization will also increase or decrease
according to the assets. The accounting equation is based on the bilateral concept of
accounting. Thus, "the accounting equation is true under all circumstances and at all times."
conclusion
( Accounting equation is an accounting formula expressing equivalence of the two
expression of Assets and Liabilities. )
Explanation of Accounting Equation by Balance Sheet.
The accounting equation can be explained by the following balance sheet (or position
statement)
( Balance Sheet )
Liabilities Amount ₹ Assets Amount ₹
Capital 40,000 Cash 5,000
Liabilities Bank 10,000
Creditors 30,000 Debtors 20,000
Loan 30,000 Stock 15,000
Fixed Assets 50,000
1,00,000 1,00,000
The sum of both sides of the balance sheet is always equal. The total assets in this balance
sheet are ₹ 1,00,000, the total external liabilities are ₹ 60,000 and the capital is ₹ 40,000.
This balance sheet can be represented in the form of an accounting equation as follows:
Assets = Liabilities + Capital
₹1,00,000 = ₹60,000 + 40,000

3. Capital = Assets - Liabilities
40,000 = 1,00,000 - 60,000
Liabilities = Assets - Capital
60,000 = 10,000 - 40,000
Thus, the accounting equation confirms that in each case the amount of assets is equal to
the amount of liabilities and capital. Accounting principles have many names, such as
(i) Fundamental Assumptions
(ii) Concepts
(iii) Postulates
Accounting equation can also be expressed in the following form.
A = L + C A = Assets
A = E E = Equities
A = O.E + C.E. C = Capital
A = I.L. + E.L. L = Liabilities
C = A - L O.E. = Owner's Equity
C.E. = Creditor's Equity
I.L. = Internal Liabilities
E.L. = External Lia
(Business)
(Accounting Equation)
⇩⇩⇩⇩⇩⇩
(Debit Items) ( Assets) (Credit Items) ( Liabilities)
1. Good will 1. Capital
2. Land and Building 2. Reserve and Surplus
3. Machinery 3. Loan
4. Furniture 4. Overdraft
5. Stock 5. Creditors
6. Investment 6. Bill Payable
7. Debtors 7. Outstanding Expenses
8. Bill Receivable 8. Income Received in Advance
9. Prepaid Expenses

4. 10. Bank
11. Cash
( Types of Transaction affecting Accounting Equation )
There are two types of transactions from the point of view of accounting equation:
1. Transactions affecting two items.
2. Transactions affecting more than two items.
1. Transactions affecting two items - This category includes transactions affecting two items
of the accounting equation. This too can be further divided into two categories:
(a) Transactions affecting both the sides of Accounting Equation:
(i) Increase in assets, Increase in liabilities
Example:
Transaction Effect (+)
* Started business with Cash Cash ( Asset ) & Capital ( Liability )
* Credit Purchase of goods Stock ( Asset ) & Liabilities ( Creditors )
* Bank Loan Bank (Asset ) & Liabilities ( Loan )
* Credit purchase of asset Asset & Liabilities
* Received Commission Cash ( Asset ) & Capita
( ii ) Decrease in Assets, Decrease in Liabilities
Example:
Transactions Effect (-)
* Payment to Creditors Cash & Liabilities
* Drawings Cash & Capital
* Rent Paid Cash & Capital
* Depreciation on Machine Machine & Capital
(2) Transaction affecting one side of Accounting equation but in opposite direction.
( i )Increase in one Asset, Decrease in another Assets

5. Transactions Effect ( -,+ ) ( +,- )
* Cash Purchases ( - ) Cash, ( + ) Stock
* Cash received from Debtors ( + ) Cash, ( + ) Debtors
* Deposited into Bank ( + ) Bank, ( - ) Cash
* Investment Purchased ( + ) Investment, ( - ) Cash
* Withdrew cash from Bank ( + ) Cash, ( - ) Bank
( ii )Increase in Liabilities, Decrease in Liability
Transaction Effect
Acceptance of Bill Payable ( + ) B/R, ( - ) Credit ors
2. Transactions affecting more than two Items - Some transactions affect more than two
items of the accounting equation.
Example
(i) Goods costing ₹ 20,000 were sold for ₹ 25,000 (ie ₹ 5,000 were sold at a profit). Here the
cost of goods is ₹ 20,000, this will reduce the asset i.e. stock by ₹ 20,000, the cash i.e. the
asset will increase by ₹ 25,000 due to the sale of goods and also the capital due to the
goods sold at a profit of ₹ 5,000 ( ₹ 25,000 - 20,000).
Note :
If the goods were sold at a loss then the owner's capital would be reduced by the amount of
loss i.e. Profit increases owner's capital and less decreases capital.
Importance or purposes of Accounting equation
(1) Accounting equation helps the common man to understand the rules and practices of
bookkeeping and accounting.
(2) The accounting equation presents the business and its owner as two separate entities.
(3) Accounting equation is also called balance sheet equation. It helps in the preparation of
financial balance sheet. Through this the financial position of the business unit can be
determined.
Classification of Account and Rules for Developing Accounting Equation

6. In order to develop the accounting equation, accounts can be divided into three classes,
namely:
1. Asset Account,
2. Capital Account, and
3. Liabilities Account
Rule. 1) For change in assets- For increase in assets, property account is debited and for
decrease in assets, property account is credited. Increase in assets is debited and decrease
in assets is credited .
Rule 2 - For change in capital - Capital account is credited when there is increase in capital
and capital account is debited when there is decrease in capital. Increase in capital is
credited and decrease in capital is debited .
Rule 3- For change in liabilities - Liability account is credited for increase in liabilities and
Liability account is debited when there is decrease in liabilities. Increase in liabilities is
credited and decrease in liabilities is debited .
Note
- There are same type of rules for change in capital and liabilities. Therefore it can be
said that there are only two basic concepts regarding accounting equation.
Analysis of Changes in Capital Account
The reasons for increase or decrease in capital account may be due to:
> private investment and infusion of additional capital
> Withdrawal of cash for personal use
> Drawing of Goods for Personal Use
> revenue and income
> Expenses / Expenses and Losses

7. Effect of financial Transactions on Accounting equation
Financial transactions (or transactions) have an impact on the accounting equation. Due to
transactions, either equality remains in the equation or a new equation is obtained. In fact, it
is because of the 'bilateral concept'. Such a transaction has an effect (in the form of increase
or decrease) on one side of the equation, as well as its effect (increase or decrease) on the
other side of the equation. Whatever the effect, the accounting equation remains balanced.
The possible types of changes or effects could be:
(i) increase in one asset, decrease in another asset,
(ii) increase in assets, increase in liability,
(iii) increase in assets, increase in capital
(iv) decrease in assets, decrease in liabilities
(v) decrease in assets , decrease in capital
(vi) increase in one liability, decrease in another liability
(vii) decrease in liability, decrease in capital
(viii) increase in capital, (external) decrease in liability.
Explanation by Example of Accounting Equation
Basic Accounting equation
Profit and Loss Account Equation
The difference between total income and total expenditure is the profit or loss of the
business.
Ownership equity means increase in capital and assets also increases when there is
revenue and income, but due to increase in expenditure or loss of business, there is a
decrease in ownership equity i.e. both capital and assets. Profit and loss do not affect
external liabilities, so they remain the same. Related Accounting Equations:
1. Capital at the end - Capital in the beginning = Profit
2. Capital in the beginning - Capital at the end = Loss
3. Profit = Revenue - Expenses

8. 4. Loss = Expenses - Revenue
Drawing and Additional or fresh Capital
Both capital and cash increase when the business owner invests additional capital, but it is
not a profit. Similarly, there is a decrease in both capital and cash on withdrawal by the
owner, but it is not a loss. On this basis, after obtaining Adjusted Capital in place of closing
capital, it will be compared with the initial capital, so that the profit can be calculated
accurately.
5. Closing Capital + Drawing - Additional Capital = Adjusted Capital
6. Adjusted Capital - Opening Capital = Profit
7. Opening Capital - Adjusted Capital = Loss .