# ACCOUNTING EQUATION Class 11

An accounting equation represents the mathematical relationship between the assets, liabilities, and owner’s

The recording of business transactions in the books of account is based on a fundamental equation is called
Accounting Equation.
Total Assets of a business enterprise are equal to the sum of its liabilities and the capital (Total Liabilities).

An Accounting equation is based on the dual aspect concept of accounting, according to which, every
transaction has two aspects namely Debit and Credit. It means that every transaction in accounting
effect both Debit (DR.) and Credit (Cr.) side equally.
The fundamental accounting equation, also called the balance sheet equation.
It is the foundation for the double-entry book-keeping system.
An accounting equation remains balanced all the time.

### Accounting Equation Formula-

Total Assets = Total Liabilities
Or
Total Assets = Internal Liabilities + External Liabilities
Or
Assets = Capital + Liabilities (A = C+L)
Or
Assets = Equities
Or
Capital = Assets – Liabilities (C = A–L)
Liabilities = Assets – Capital (L = A–C)

Following are the nine basic transactions —
1. Increase in assets with corresponding increase in capital.
2. Increase in assets with corresponding increase in liabilities.
3. Decrease in assets with corresponding decrease in capital.
4. Decrease in assets with corresponding decrease in liabilities.
5. Increase and decrease in assets.
6. Increase and decrease in liabilities
7. Increase and decrease in capital
8. Increase in liabilities and decrease in capital
9. Increase in capital and decrease in liabilities.

### 1.Increase in assets with corresponding increase in capital-

1.Mr. Mohit started Business with cash Rs. 9,00,000.
Cash Account (Assets Account)
Owner’ Account (Capital Account)
Assets Increase in form of Cash
Capital Increase in form investment by owner
Accounting equation

Assets             =           Capital + Liabilities
Cash               =           Capital + Liabilities
9,00,000        =            9,00,000 + 0

### 2.Increase in assets with corresponding increase in liabilities-

2. Machinery Purchased on credit from Bharat Machinery house Rs. 2,00,000.
Machinery Account (Assets Account)
Creditors Account (Liabilities Account)
Assets Increase in form of Machinery
Liabilities Increase in form creditors for machinery
Accounting equation

Assets      =          Capital       + Liabilities
Cash          + Machinery    =           Capital      + Creditors (B.M.H)
Old Equation   9,00,000 + 0                    =            9,00,000 + 0
Transaction     0 + 2,00,000      =            0               + 2,00,000
New Equation      9,00,000 + 2,00,000     =             9,00,000 + 2,00,000

### 3.Decrease in assets with corresponding decrease in capital-

3.Mr. Mohit withdrawn cash Rs.50,000 for personal use.

Cach  Account        (Assets Account)

Drawing Account   (Capital Account)

Assets Decrease in form of cash

Capital Decrease in form of personal use

Accounting equation-

Assets   =   Capital     +  Liabilities

Cash   + Machinery  =  Capital    + Creditors for Machinery

Old Equation    9,00,000  +     2,00,000    =  9,00,000     +  2,00,000

Transaction  (-) 50,000  +       0  =  (-) 50,000    +       0

New Equation    8,50,000    +     2,00,000    =  8,50,000       +  2,00,000

### 4.Decrease in assets with corresponding decrease in Liabilities-

4.Cash Paid to Bharat Machinery House Rs.1,50,000.

Cach  Account        (Assets Account)

Creditors Account   (Liabilities Account)

Assets Decrease in form of cash

Liabilities Decrease in form of creditors

Accounting equation –

Assets   =   Capital     +  Liabilities

Cash   + Machinery  =  Capital    + Creditors for Machinery

Old Equation  8,50,000    +     2,00,000  =  8,50,000     +  2,00,000

Transaction  (-)1, 50,000  +       0    =              + (-)1, 50,000

New Equation  7,00,000  +     2,00,000  =  8,50,000     +  50,000

### 5.Increase and Decrease in assets-

5.Furniture Purchased for cash Rs.20,000.

Cach  Account        (Aeets Account)

Furniture Account   (Assets Account)

Assets Decrease in form of cash

Assets Increase in form of Furniture

Accounting equation-

Assets   =   Capital     +  Liabilities

Cash   + Machinery + Furniture   =  Capital    + Creditors for Machinery

Old Equation  7,00,000    +  2,00,000 +      0    =  8,50,000     +  50,000

Transaction  (-) 50,000  +  0    +  50,000  =    0  +  0

New Equation  6,50,000  + 2,00,000  +  50,000  =  8,50,000     +  50,000

### 6.Increase and decrease in liabilities-

6.Acceptance given to Bharat Machinery House Rs.20,000.

Bharat Machinery House Account (Creditors)       (Liabilities Account)

Bills Payable Account   (Liabilities Account)

Liabilities Decrease in form of Creditors

Liabilities Increase in form of Bills payable

Accounting equation-

Assets     =   Capital     +  Liabilities

Cash   + Machinery + Furniture =  Capital    + Creditors for Machinery + Bills Payable

Old Equation  6,50,000  + 2,00,000  +  50,000  =  8,50,000     +  50,000        +         0

Transaction  0    +  0  +    0  =    0  +  (-20,000)  +  20,000

New Equation  6,50,000  + 2,00,000  +  50,000  =  8,50,000     +  30,000        +    20,000

### 7.Increase and decrease in capital-

7.Interest allowed on capital Rs. 8,500.

Interest on capital Account  (Expenses Account)

Capital Account  (Capital Account)

As interest on capital is the Expense of business it should be shown or deducted in the capital as well as interest of capital is the amount which is to be given to the owner as capital is the amount which is invested by the owner, therefore it is to be added back to Capital.

Accounting equation-

Assets     =   Capital     +  Liabilities

Cash   + Machinery + Furniture =  Capital    + Creditors for Machinery + Bills Payable

Old Equation  6,50,000  + 2,00,000  +  50,000  =  8,50,000     +  30,000        +    20,000

Transaction  0  +  0  +  0  =  – 8,500  +    0  +    0

+ 8,500

New Equation  6,50,000  + 2,00,000  +  50,000  =  8,50,000     +  30,000        +    20,000

### 8.Increase in Liabilities and decrease in capital-

8.Out standing salaries Rs.10,000.

Salareies Account  (Expenses Account)

Outstanding Salaries Account  (Liabilities Account)

As Expense not paid yet or Outstanding but belong to current financial year so it is deducted from Capital & business has to pay it in near future so it is the liability of the firm.

Accounting equation-

Assets     =   Capital     +  Liabilities

Cash + Machinery + Furniture =  Capital    + Creditors for Machinery + Bills Payable + Out Standing Exp.

Old Equation  6,50,000  + 2,00,000  +  50,000     =  8,50,000         +   30,000                +    20,000  +    0

Transaction  0  +  0  +  0       =  – 10,000  +    0    +  0   +  10,000

New Equation  6,50,000  + 2,00,000  +  50,000    =   8,40,000     +        30,000                +       20,000 + 10,000

## Important points-

#### Transaction related to Expenses

Expenses paid in cash .The transaction will affect both sides as cash (Assets) has been paid so it(Assets) is to be reduced as well as Capital is to be reduced because expense is to be born by the owner.

#### Transaction related to Income

Income or Profit is the reward for taking risk, as risk is taken by the owner so it is to be added in Capital.

The transaction will affect both sides as cash has been received so it is to be added back in cash as well as in Capital.

#### Transaction related to Interest on Capital

As interest on capital is the Expense of business it should be shown or deducted in the capital as well as interest of capital is the amount which is to be given to the owner as capital is the amount which is invested by the owner, therefore it is to be added back to Capital.

The transaction will affect Liability side as Interest of Capital should be added back & deducted from Capital as both of them belong to the owner.

#### Transaction related to interest on Drawing

As interest on Drawing is the Income of business it should be shown or added  back in the capital as well as interest of Drawing is the amount which is to be given by the owner to the business so it is treated as drawing and deducted from the Capital.

The transaction will effect Liability side as Interest of Drawing should be added back & deducted from Capital as both of them belong to the owner.

#### Transaction related to outstanding Expense

As Expense not paid yet or Outstanding but belong to current financial year so it is deducted from Capital & business has to pay it in near future so it is the liability of the firm.

The transaction will affect Liability side as outstanding expense is a Liability should be shown in the Liability side & Expense should be deducted from Capital.

#### Transaction related to Prepaid or Advance Expense

As Expense paid in advance so it is not belong to current financial year, so it can not be deducted from Capital.

It as an amount which is paid by the business firm for the future course of activity till the activity not happened it is the Assets of the business.

The transaction will affect both sides as Prepaid expense is a Asset should be shown in the Assets side & Cash paid by the business should be deducted from Cash column of assets side.

#### Transaction related to Advance Income

As Income received in advance so it is not belong to current financial year, so it can not be added back to the Capital.

It as an amount which is received by the business firm for the future course of activity till the activity not happened it is the Liability of the business.

The transaction will effect both sides as Advance Income is a Liability should be shown in the Liability side & Cash received by the business should be added back to the Cash column of assets side.

#### Transaction related to Accrued Income

Income is to be added back into the capital but as it is not received should be shown in the Assets Side as accrued Income because it meant to be received in this financial year.

The transaction will effect both sides as Accrued Income has been added back to the capital & as it is not received so it is to be shown in the assets side as an asset.

### ALSO READ: Nature of Management as Science, Art and Profession

Accounting Equation Class 11

Financial Accounting Quiz Questions and Answers

error: Alert: Content is protected !!