Accounting equations | lecture 4 | ezair commercia live

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Accounting Equation
The Accounting Equation is the foundation of the entire accounting system. It shows the relationship between a business’s assets, liabilities, and capital. Every financial transaction of a business affects this equation, and it always remains balanced.

Meaning of Accounting Equation

The accounting equation states that:

Assets = Liabilities + Capital

This means that everything a business owns (assets) is financed either by outsiders (liabilities) or by the owner (capital).

Explanation of Terms
1. Assets

Assets are the resources owned by a business which have economic value and help in earning income in the future.

Examples:
Cash, Furniture, Machinery, Building, Stock, Debtors, Bank Balance.

2. Liabilities

Liabilities are the amounts payable by the business to outsiders. These are obligations that the business must pay in the future.

Examples:
Creditors, Bank Loan, Bills Payable, Outstanding Expenses.

3. Capital

Capital is the amount invested by the owner in the business. It represents the owner’s claim on the assets of the business after liabilities are paid.

Capital = Assets – Liabilities

Importance of Accounting Equation

It forms the basis of the Double Entry System.

It helps in checking the accuracy of accounting records.

It shows the financial position of the business.

It ensures that every transaction has a dual effect.

It helps students understand how transactions affect accounts.

Effect of Business Transactions on Accounting Equation

Owner invests cash

Assets increase (Cash)

Capital increases

Equation remains balanced

Purchase of goods for cash

One asset (Cash) decreases

Another asset (Goods) increases

Total assets remain the same

Purchase of goods on credit

Assets increase (Goods)

Liabilities increase (Creditors)

Payment to creditors

Assets decrease (Cash)

Liabilities decrease

Withdrawal of cash for personal use (Drawings)

Assets decrease

Capital decreases

Accounting Equation with Example

If a business has:

Assets = ₹1,00,000

Liabilities = ₹40,000

Then,
Capital = Assets – Liabilities = ₹60,000

So,
Assets (₹1,00,000) = Liabilities (₹40,000) + Capital (₹60,000)

Conclusion

The accounting equation is the backbone of accounting. It helps in recording transactions correctly and ensures that the books of accounts are always balanced. Understanding this concept is essential for mastering accounting at the Class 11 and Class 12 level.

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