Accounting Equation - Class XI

The basic accounting equation, also called as the balance sheet equation, represents the relationship between the assets, liabilities and capital of a business. It is the foundation for the double entry book-keeping system. For each transaction, the total debit equals the total credit. Following is the accounting equation:

Dual aspect concept is the basic concept of accounting, According to which every business transactions has a dual effect. As the name implies , the entry made for each transaction is composed of two parts- one for the debit and the other for the credit. Every debit has an equal amount of credit. So, the total of all debits equal to the total of all credits. This gives basic accounting equation:

The accounting equation is Assets = Capital + Liabilities. Here, Assets = 50,000 (Capital) + 20,000 (Liabilities) = 70,000.

Dual aspect is the foundation or basic principle of accounting. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.

The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :

Assets = Liabilities + Capital

In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital(owners’ equity) and that of outsiders, as Liabilities(creditors equity).

Using the accounting equation Assets = Capital + Liabilities, we have 3,00,000 = 1,00,000 + Liabilities. Therefore, Liabilities = 3,00,000 - 1,00,000 = 2,00,000.

Net worth (or owner's equity) represents the residual interest in the assets of the entity after deducting all its liabilities.

Initially, Assets (50,000) = Capital (50,000). After buying furniture on credit, Assets increase by 2,000 (furniture) and Liabilities increase by 2,000. The new equation is 52,000 = 50,000 + 2,000.

The cost of goods sold formula is Opening Stock + Purchases + Direct Expenses - Closing Stock = Cost of Goods Sold. Since Sales = Cost of Goods Sold + Gross Profit, the equation becomes Gross Profit + Opening Stock + Direct Expenses + Purchases - Closing Stock = Sales.

When Owner is retaining earnings , it will  increase owners equity along with the cash or bank balance. 

Starting capital is 2,00,000. Purchasing goods on credit increases assets (stock) by 20,000 and increases liabilities (creditors) by 20,000. Total assets = 2,20,000; Capital = 2,00,000; Liabilities = 20,000. Thus, 2,20,000 = 2,00,000 + 20,000.

Dual aspect is the foundation or basic principle of accounting. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.

The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :

Assets = Liabilities + Capital

In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital(owners’ equity) and that of outsiders, as Liabilities(creditors equity).

Owner's equity = Assets - Liabilities. 2,60,000 - 60,000 = 2,00,000.

The total of outside liabilities and owner's equity represents the total claims against the assets of the business, which is defined as total liabilities (or total equities).

An increase in one liability can be balanced by a decrease in another liability (e.g., paying off a creditor with a bank loan) or an increase in an asset (e.g., taking a loan to buy equipment).

Capital represents the owner's claim on the business assets. It is calculated as Total Assets minus Total Outside Liabilities.

Purchasing furniture for cash involves an increase in the Furniture account (asset) and a decrease in the Cash account (asset).

Owner's equity is the sum of Capital, Reserves, and Retained Earnings. 1,00,000 + 50,000 + 40,000 = 1,90,000.

Accounting Equation :- Total Assets = Capital+ Liabilities