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IBS Accounting Equation

The document discusses the accounting equation, which states that the total assets of a business must equal the total claims against it (liabilities plus capital). It provides an example balance sheet showing total assets of Rs. 7,25,000 equaling total claims of Rs. 7,25,000. The document then explains how transactions like purchasing inventory, receiving credit, making sales, and withdrawing cash affect the accounting equation by changing asset and claim amounts while maintaining an overall balance.

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Ritam chaturvedi
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60 views

IBS Accounting Equation

The document discusses the accounting equation, which states that the total assets of a business must equal the total claims against it (liabilities plus capital). It provides an example balance sheet showing total assets of Rs. 7,25,000 equaling total claims of Rs. 7,25,000. The document then explains how transactions like purchasing inventory, receiving credit, making sales, and withdrawing cash affect the accounting equation by changing asset and claim amounts while maintaining an overall balance.

Uploaded by

Ritam chaturvedi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Accounting Equation

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MEANING OF AN ACCOUNTING EQUATION

Liabilities Rs. Assets Rs.


Capital 4,00,000 Fixed Assets:
Secured Loan: Land and Building 3,00,000
From Bank 2,25,000 Machinery 2,00,000
Current Liabilities: Computer 50,000
Creditors 75,000 Current Assets:
Expenses Outstanding 25,000 Stock 50,000
Debtors 1,00,000
Cash and Bank Balances 25,000
Total 7,25,000 Total 7,25,000

Overview of the Balance Sheet that shows the Accounting Equation


discussed above
2
Accounting Equation
An accounting equation is a statement of equality between the
resources and the sources which finance the resources and is
expressed as follows:

Assets = Liabilities + Capital


MEANING OF AN ACCOUNTING EQUATION

• An Accounting Equation is a mathematical expression which shows that the assets and
liabilities of a firm are equal.

• An Accounting Equation is based on the dual aspect concept of accounting i.e., every
transaction has two aspects-debit and credit.

• It holds that for every debit there is a credit of equal amount and vice versa.

4
MEANING OF AN ACCOUNTING EQUATION

Total Claims (i.e. Capital and Liabilities) are always equal to the total
Assets and is known as Accounting Equation.
The claims, also known as equities. are of two types:
1. Owner's equity or capital, and
2. Outsiders Equity (Liabilities or amounts due to outsiders).
We can express Accounting Equation as follows:
a) Assets = Liabilities + Capital or
b) Liabilities = Assets – Capital or
c) Capital = Assets - Liabilities

5
MEANING OF AN ACCOUNTING EQUATION

Liabilities Rs. Assets Rs.


Capital 4,00,000 Fixed Assets:
Secured Loan: Land and Building 3,00,000
From Bank 2,25,000 Machinery 2,00,000
Current Liabilities: Computer 50,000
Creditors 75,000 Current Assets:
Expenses Outstanding 25,000 Stock 50,000
Debtors 1,00,000
Cash and Bank Balances 25,000
Total 7,25,000 Total 7,25,000

Overview of the Balance Sheet that shows the Accounting Equation


discussed above
6
Effect of Transactions on Accounting Equation

Suppose, Rakesh starts business and the following successive


transactions are entered into:
(1) He commences his business with Rs. 20,000 as Capital.
Effect: It means that the firm has assets totalling Rs. 20,000 in
the form of cash and claims against the firm are also Rs. 20.000
in the form of capital. The equation stands as follows:

Particulars Assets = Liabilities + Capital


Cash
Capital Introduced 20,000 = 0 + 20,000
7
Effect of Transactions on Accounting Equation

(2) Purchases furniture for Rs. 500 in cash.


Effect: It means cash in hand is reduced by Rs. 500 but a new asset
(furniture) of the same amount has been purchased. Thus, total of
assets remains unchanged. The equation will now appear as follows:

  Assets = Liabilities + Capital


Cash + Furniture Rakesh's
Old Balance 20,000 + 0 = 0 + 20,000
Purchased
- 500 + 500 = 0 + 0
Furniture
New Balance 19,500 + 500 = 0 + 20,000
8
Effect of Transactions on Accounting Equation

(3) Purchases goods for Rs. 1,000 in cash.


Effect: It means cash in hand is reduced by Rs. 1,000 and another asset,
i.e., stock has come into existence but the total of assets remains
unchanged. The equation now will be as follows:

Assets = Liabilities + Capital


 
Cash + Furniture + Stock Rakesh's
Old Balance 19,500 + 500 + 0 = 0+ 20,000
Purchased Stock -1,000 + 0 + 1,000 = 0 + 0
New Balance 18,500 + 500 + 1,000 = 0+ 20,000

9
Effect of Transactions on Accounting Equation

(4) Purchases goods for Rs. 2,000 on credit.


Effect: It means the stock has increased by Rs. 2,000 making the total
assets Rs. 22,000. A liability of Rs. 2.000 to the supplier of the goods
(creditor) has arisen. The equation now will be as follows:

Assets = Liabilities +Capital


Cash + Furniture + Stock Creditors + Rakesh's

Old Balance 18,500 + 500 + 1,000 = 0 + 20,000


Credit 0 + 0 + 2,000 = 2,000 + 0
Purchase
New Balance 18,500 + 500 + 3,000 = 2,000 + 20,000

10
Effect of Transactions on Accounting Equation

(5) Sold goods costing Rs. 2,500 on credit


for Rs. 4,000.

Assets = Liabilities + Capital


 
Cash + Furniture + Stock + Debtors = Creditors + Rakesh's

Old Balance 18,500 + 500 + 3000 + = 2,000 + 20,000


0
Credit Sales + 0 - 2500 + 4000 = 0 + 1500
New Balance 18,500 + 500 + 500 + 4,000 = 2,000 + 21500

11
Effect of Transactions on Accounting Equation

(6) Rakesh withdraws Rs. 2,000 for personal use.


Effect: Cash in hand is reduced by Rs. 2,000 and capital will also reduced
by the same amount. The new Accounting Equation will be as follows:

          Assets     = Liabilities + Capital


  Cash + Furniture + Stock + Debtors = Creditors + Rakesh’s
Old Balance 18,500 + 5,00 + 500 + 4,000 = 2,000 + 21,500
New -2,000 + 0 + 0 + 0 = 0 - 2,000
Transaction

New Balance 16,500 + 500 + 500 + 4,000 = 2,000 + 19,500

12
Effect of Transactions on Accounting Equation

It will be observed from above that the total of assets will always be
equal to the total of liabilities and the capital.
The last equation stated above can also be presented in the form of a
statement i.e.
Balance Sheet
Liabilities Rs. Assets Rs.
Creditors 2,000 Cash 16,500
Capital 19,500 Furniture 500
Stock 500
Debtors 4,000
21,500 21,500

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