ACCOUNTING EQUATIONS
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 of Concept accounting. It holds that for
every debit there is a credit of equal amount and vice versa. It means, total
claims (those of outsiders and of the proprietors) will always be equal to the
assets of the firm. The claims, also known as equities, are of two types:
1. Owner's equity or capital and
2. Liabilities or amounts due to outsiders (i.e., Outsiders'
Equity).
We can express it as follows: ASSETS = CAPITAL +
LIABILITIES
The above relationship is known as the Accounting Equation
or the Balance Sheet Equation.
Effect of Transaction on Accounting Equation: - A
transaction may affect either both sides of the equation by the same amount or
one only, by both increasing or decreasing it by equal amounts. Transaction
from the Accounting Equation viewpoint, can be divided into two, i.e.,
1. Transaction Affecting Two Items and
2. Transaction Affecting More Than Two Items.
Process of Preparing Accounting Equation: - The process of
Accounting Equations begins with:
1. Analyzing the transaction in terms of variables, i.e.,
assets, liabilities, capital, revenues and expenses.
2. Decide the effect of the transactions in terms of
increase or decrease of variable stated in 1 above.
3. Record the effect on the relevant side of the equation.
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