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.

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 

According to Terminology of Cost Accountancy overhead absorption is defined as “the charging overheads to cost units by means of rates separately calculated for each cost centre. In most cases the rates are pre-determined”.

The fundamental accounting equation is Assets = Liabilities + Capital (or Owner's Equity). Since none of the options A, B, or C correctly state this relationship, 'None of the above' is the correct choice.

The Balance Sheet is the financial statement that displays the accounting equation (Assets = Liabilities + Owner's Equity) at a specific point in time.

The Balance Sheet is the financial statement that is structured directly based on the accounting equation (Assets = Liabilities + Equity).

Accounting is based on dual aspect which signifies that for every debit, there will be a credit and vice versa.

Accounting equation is the foundation of double entry system of book-keeping. It displays that all the assets are either financed by borrowing money or paying from the shareholder's equity. The balance sheet being the complex version shows explain the equation very clearly and it shows that total assets is equal to total liability plus shareholder's equity. Debit and credit are similar to accounting equation. Hence, american accountants have derived the rules of debit and credit through accounting equation.

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Hence, the two aspects are giving and receiving of benefits.

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), which together are called as Equities.

Hence, option (B) is correct.

Accounting equation may defined as:

As per dual concept, every transaction has two effects. One effect must be debit and the other must be credit. Dual aspect concept has been made on the basis of accounting equation. In accounting equation, there are two sides. One side represents total assets and other side represents total liabilities. The total liabilities include capital and external liabilities. Assets always equal to liabilities.