Acounting

Mechanics
:

Accountin
g Equation
A U T H O R: D AV I N D E R K A U R
SOHI
 Double Entry system of Book-Keeping can be explained

by the accounting equation

Assets = Equities

The properties owned by business are called Assets.

The rights to the properties are called Equities.

Accounting Equities may be sub-divided into two principle types:

Equation The rights of the creditors & The rights of the owners.

The equity of creditor’s representing debts of the business are called

Liabilities.

The equity of owners is called Capital or Proprietorship or Owners’

Equity.

Assets = Liabilities + Capital

AUTHOR: DAVINDER KAUR SOHI OR. Capital = Assets – Liabilities 05/28/2025 2

 Meaning of Accounting
Equation:

Every transaction which passes through books of accounts is recorded at two

places because of duality concept that is : Every Debit has a Credit.

For example, as and when business is started by the owner of the business,
cash or goods are brought by the proprietor as capital. So, this transaction
has two aspects one cash or goods brought in are debited and
whosoever has paid is to be credited.

Accounting We can say that:

Capital = Total assets (either in the form of cash, goods or both).

Equation Similarly, if a bank loan is raised/ taken it has again two aspects that is cash
brought in is debited and bank is credited. In this case, cash is an asset and
bank are a liability. If it is put in accounting equation, then it is :

Capital + Liabilities = Total Assets (Cash +Goods).

In the first case capital brought in by the owner is also termed owner’s equity
in the accounting language whereas in the second case ,the loan capital
brought in is known as loan capital or capital or provided by the outsider.

That every transaction before it is recorded, is analyzed to ascertain

which account is to be debited and which to be credited.

Test of equality is to be kept in mind before recording all the transactions.

05/28/2025 AUTHOR: DAVINDER KAUR SOHI 3

Accounting Equation:
Example of Accounting Equation
Accounting Equation

Q. Arun had the following transactions. Use accounting equation to show their effect on his asset ,liabilities and capital

1Started business with cash Rs. 5,000 Transaction Assets Equal to Liabilities Plus Capital
2Purchased goods on credit Rs. 400
3Purchased goods for cash Rs. 100 1Anil started business with cash Rs. 5,000 5,000equal to 0Plus 5,000
4Purchased furniture Rs. 50 2Purchased goods on credit for Rs. 400 400equal to 400Plus 0
5Withdrew for personal use Rs. 70 New equation 5,400equal to 400Plus 5,000
6Paid rent Rs. 20
7Received interest Rs. 10 3Purchase goods for cash R.s 100 Plus 100
8Sold good costing Rs. 50 on credit for Rs. 70 minus 100 equal to 0Plus 0
9Paid to creditors Rs. 40 New equation 5,400equal to 400plus 5,000
10Paid for salaries Rs. 20
11Further capital invested Rs. 1,000 4Purchased furniture Rs. 50 Plus 50 equal to
12Borrowed from P Rs. 1,000 minus 50 equal to 0Plus 0
New equation 5,400equal to 400Plus 5,000

5Withdrew for personal use Rs. 70 minus 70 equal to 0minus 70

New equation 5,330equal to 400plus 4,930

6Paid rent minus. 20 equal to 0Plus -20

New equation 5,310equal to 400Plus 4,920

7Received interest Rs. 10 Plus 10 equal to 0Plus 10

New equation 5,320equal to 400Plus 4,920

8Sold goods costing Rs. 50 on credit for Rs. 70 Plus 70

minus 50 equal to 0Plus 20
New equation 5,340equal to 400Plus 4,940

9Paid to creditors Rs. 40 minus 40 equal to minus 40 Plus 0

New equation 5,300equal to 360Plus 4,,940

10Paid for salaries Rs. 20 minus 20 equal to 360minus -20

New equation 5,280equal to 360Plus 4,920

11Further capital invested 1,000equal to 0Plus 4,920.00

New equation 6,280 360Plus 5,920

12Borrowed fro P Rs. 1,000 1,000equal to 1,000Plus 0

7,280equal to 1,360Plus 5,920

AUTHOR: DAVINDER KAUR SOHI 05/28/2025 4

Accounting
Equation

Thank
You

AUTHOR: DAVINDER KAUR SOHI 05/28/2025 5