Question

Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.

Answer 1

It is very much true that accounting equation remains intact under all circumstances the reason behind is that accounting equation is another form of dual aspects concept. Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital ( owners 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 entry 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 balance sheet, which states the financial position of the business on a particular date. When we analyse the transaction, we actually try to know that how balance sheet of a business entry gets affected, Assets side of the balance sheet is the list of assets, which the business entry owns. The liabilities side of the balance sheet is the list of owner's claims and outsider's claims, i.e.what the business entry owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justified the name of accounting equation as 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 sides.