**Accounting Equation**means that in each case the

__Every transaction changes the assets, liabilities and capital of the business and even after the change the assets of the business remain equal to the business obligations and capital. If a transaction leads to an increase in assets. So by that amount, either the liabilities will increase or the capital will increase.__

**amount of assets is equal to capital and liability.**- The accounting equation is based on the double entry system.
- In the accounting equation, the assets of the company / business are equal to the total liabilities and equity shareholder.
- In the accounting equation, the company's balance sheet remains balanced and every entry made on the debit side is equal to the credit side.

Accounting Equation |

To understand the accounting equation properly, it is very important to know the balance sheet. A hypothetical position description is created below:

**Balance Sheet**

**Capital & Liabilities**

**Capital = ($60000)**

**Liabilities:-**

Creditors = +XXX

Bank Overdraft = +XXX

**($40000)****TOTAL = $1,00,000**

**Assets**

Cash & Bank = xxx

Debtors = xxx

Stock In Trade = xxx

Furniture = xxx

Machinery = xxx

Building = xxx

**TOTAL = $1,00,000**

It is clear from the above that assets are written in the right part of the position statement and capital and liabilities are written in the left part. The sum of the two sides of the balance sheet is always equal because the assets of the business are either purchased from the capital given by the owner to the business or purchased with money received by the other parties. In the above situation statement, the business has total assets of $100000 out of which $60000 properties have been purchased from the capital given by the owner to the business and the remaining $40,000 have been received from the other parties to the business.

## Accounting Equation Defination

The accounting equation is based on the

**double entry system**. The double entry system means that every business has 2 transactions which have 2 aspects, one debit second credit, so we can know that the**accounting equation is the foundation of the double entry system**- which it shows Determines whether the total assets of the company in the balance sheet of the company are equal to the sum of total liabilities and equity of the shareholders.## Basic Accounting Equation Formula

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 |

**This situation can be manifested by the following accounting equations: This Is Based On Balance sheet**

**Assets = Liabilities + Capital ( OWNER EQUITY)**

**$100000 = $40000 + $60000**

**Liabilities = Assets - Capital**

**$40000 = $100000-$60000**

**Capital = Assets - Liabilities**

**$60000 = $100000 - $40000**

## Accounting Equation Example

Gopal started a business and made the following transactions:

**Transactions 1.**Gopal started the business with a capital of $75,000. (Gopal started business with 75000 as capital.)

This transaction will have the effect on the business that the business has received assets in the form of $75,000 cash and the business owner owes the business $75,000 as capital. The following

**accounting equation**can be revealed:**Assets = Liabilities + Capital**

**Cash = Liabilities + Capital**

**75000 = 0 + 75000**

**Transaction 2.**Gopal purchased furniture of cash of $5,000. (Gopal purchased furniture for Cash 5,000)

The business received furniture from this transaction and the business also makes cash payments for the furniture. Only the property side has been affected by this transaction. The effect of this transaction will be on the accounting equation as follows:-

**Assets = Liabilities + Capital**

**Transaction 3.**Gopal purchased goods worth $20,000. (Gopal purchased goods for Cash (20,000) With this transaction, the business has received the goods in the form of assets and paid the cash, so the accounting equation will be affected by this transaction as follows:-

**Assets = Cash + Furniture + Goods = Liabilities + Capital**

Old Equation $70000 + $5000 + 0 0 + $75000

Transaction (-) $20000 + 0 + $20000 = 0 + 0

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New Equation $50000 + $50000 + $20000 = 0 + $75000

**Transaction 4.**Gopal purchased a loan of $16,000. (Gopal purchased goods on credit for ₹$16,000)

The business received $16,000 worth of goods as assets from this transaction, and on the other hand, buying borrowed goods also increased the liabilities of the business. Hence the

**accounting equation**will be affected by this transaction as follows:**Assets Equation**

Assets = Cash + Furniture + Goods

Old Equation = $50000 + $5000 + $20000

Transaction = 0 + 0 + $16000

-----------------------------------------------------------------------------------------------

New Equation = $50000 + $5000 + $36000

**Liabilities Equation**

Liabilities+Capital = Creditors + Capital

Old Equation = 0 + $75000

Transaction = $16000 + $0

------------------------------------------------------------------------------

New Equation = $16000 + $75000

**Transaction 5.**Sold goods borrowed for $15,000 costing $12,000. Goods costing $12,000 sold on credit for $15,000)

Selling borrowed goods will increase the assets of the business as debtors by $15,000 as future debt is to be received from these debtors. The sale of goods will reduce the merchandise by $12,000, as it is the cost of goods. On the other hand, the owner's capital will be increased by the profit of $3000 made in this deal. Thus the accounting equation will be affected by this transaction as follows:

**Assets Equation**

Assets = Cash + Furniture + Goods + Debtor

Old Equation = $50000 + $5000 + $36000 + 0

Transaction = 0 + 0 - $12000 + $15000

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New Equation = $50000 + $5000 + $24000 + $15000

**Liabilities Equation**

Liabilities+Capital = Creditors + Capital

Old Equation = $16000 + $75000

Transaction = $0 + $3000

------------------------------------------------------------------------------

New Equation = $16000 + $78000

**Transaction 6**. Paid $1,000 for rent

This transaction will reduce assets in the form of cash on one side in the business and on the other side the capital will be reduced by the payment of expenses. Hence the accounting equation will be affected as follows:-

**Assets Equation**

Assets = Cash + Furniture + Goods + Debtor

Old Equation = $50000 + $5000 + $24000 + $15000

Transaction = (-)1000 + 0 + $0 + $0

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New Equation = $49000 + $5000 + $24000 + $15000

**Liabilities Equation**

Liabilities+Capital = Creditors + Capital

Old Equation = $16000 + $78000

Transaction = $0 - $1000

------------------------------------------------------------------------------

New Equation = $16000 + $77000

It is clear from the study of the above transactions that each transaction has an impact on two items and.

**Assets = liability + capital**at each stage. Thus we can say that the accounting equation is true in all cases (Accounting Equation is true in all cases). The final balance of the transactions made in Gopal's books can be shown by making a status statement in this way.
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