Definition of Accounting Equation

Hello friends, we know very well what is the importance of accounts in our business. There are most important role of Accounting Equation in the business from which you can easily calculate total assets of your business. So, today we talk about the Concept of Basic Accounting Equations. Accounting equation shows the balance of a company’s resources. Accounting equations is the most basic principle of financial accounting.

Double entry is recorded in a manner that the accounting equation is always in balance. You know very well about the double entry system. Double Entry system is based on this concept that each transaction have two parts one part will be debited and second part will be created with the same amount.There are few important accounting equations are given below.

Basic Accounting Equation

Assets = Capital + Liabilities or, 
Assets = Liabilities + Equity

accounting equation
Assets of an entity may be financed either by external borrowing (i.e. Liabilities) or from internal sources of finance such as share capital and retained profits (i.e. Equity). Therefore, assets of an entity will always equal to the sum of its liabilities and equity.

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The accounting equation may be re-arranged as follows:
Assets – Liabilities = Equity

We may test the Accounting Equation by incorporating the effects of several transactions to see whether it still balances as theorized in the accountancy literature. For the purpose of this test, we may classify accounting transaction into the following generic types:

Transactions that only affect Assets of the entity
Transactions that affect Assets and Liabilities of the entity
Transactions that affect Assets and Equity of the entity
Transactions that affect Liabilities and Equity of the entity.

Must Read: Definition of Net Profit Gross Profit and Current Ratios

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