# What is the Accounting Equation?

## Accounting Equation:

The accounting equation is the basic element of the balance sheet and the primary principle of accounting. It helps the company to prepare a balance sheet and see if the entire enterpriseâ€™s asset is equal to its liabilities and stockholder equity. It is the base of the double-entry accounting system.

Double-entry accounting is a system that ensures that accounting and transaction equation should be equal as it affects both sides. Any change in the asset account, there should be a change in related liability and stockholderâ€™s equity account. While performing journal entries accounting equation should be kept in mind.

## How to calculate the Accounting Equation?

The accounting equation on the basis of a balance sheet can be calculated as.

• The business total assets should be located on the balance sheet for a particular period
• The liabilities of a company should be listed separately in the balance sheet and calculated
• The total liability and total stockholderâ€™s equity should be added
• The total liabilities and equity will equal the companyâ€™s asset

Also Read:Â TS Grewal Solutions for Accounting Equation

## The Formula for the Accounting Equation

Assets = Liabilities + Shareholderâ€™s Equity

## Example of Accounting Equation:

1. For the budgetary year, leading retailer ABC firm incorporated the following points on its balance sheet:

Total assets: â‚¹190 crore

• Total liabilities: â‚¹130 crore

Total shareholders’ equity: â‚¹60 crore

If we evaluate the accounting equation (Liabilities + Equity), we arrive at (â‚¹130Cr + â‚¹50Cr) = â‚¹190 crore, which equals to the calculation of the assets submitted by the company.

2. An organisation ABC wish to buy a â‚¹500 manufacturing machine using cash. This deal will result in debt of (-â‚¹500) for equipment and (+â‚¹500) as a credit to cash. Therefore, the accounting equation will be.

The above mentioned is the concept, that is elucidated in detail about â€˜What is accounting equation?â€™ for the Commerce students. To know more, stay tuned to BYJUâ€™S.

Must Read:Â DK Goel Solutions for Accounting Equation