Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
It is very much true that the accounting equation remains intact under all circumstances the reason behind is that the accounting equation is another form of dual aspect concept. Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner's equity). This is the reason that the Accounting equations read as follows.
A = L + C
Where,
A = Assets
L = Liabilities
C = Capital
In every circumstance, the business entity must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called Capital and that of the outsides is known as Liabilities.
Each element of the equation is the part of the balance sheet, which states the financial position of the business on a particular date. When we analyse the transactions, we actually try to know that how the balance sheet of a business entity gets affected. The asset side of the balance sheet is the list of assets, which the business entity owns. The liabilities side of the balance sheet is the list of owner's claims and outsider's claims, i.e., what the business entity owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justifies the name of the accounting equation as the balance sheet equation also.
Example When business is started with cash Rs. 2,00,000, the equation would be
Cash (2,00,000) = Capital (2, 00, 000)
When goods is purchased for cash Rs 50,000, the equation would be
Cash (2,00,000 - 50,000 = 1,50,000) + Stock (50,000) = Capital (2,00,000)
Hence, the equation would be equal both the sides.
It is very much true that the accounting equation remains intact under all circumstances the reason behind is that the accounting equation is another form of dual aspect concept. Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner's equity). This is the reason that the Accounting equations read as follows.
A = L + C
Where,
A = Assets
L = Liabilities
C = Capital
In every circumstance, the business entity must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called Capital and that of the outsides is known as Liabilities.
Each element of the equation is the part of the balance sheet, which states the financial position of the business on a particular date. When we analyse the transactions, we actually try to know that how the balance sheet of a business entity gets affected. The asset side of the balance sheet is the list of assets, which the business entity owns. The liabilities side of the balance sheet is the list of owner's claims and outsider's claims, i.e., what the business entity owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justifies the name of the accounting equation as the balance sheet equation also.
Example When business is started with cash Rs. 2,00,000, the equation would be
Cash (2,00,000) = Capital (2, 00, 000)
When goods is purchased for cash Rs 50,000, the equation would be
Cash (2,00,000 - 50,000 = 1,50,000) + Stock (50,000) = Capital (2,00,000)
Hence, the equation would be equal both the sides.
