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Class-XI

Accountancy

Topic – Accounting Equation

ACCOUNTING EQUATION
An Accounting equation is based on the dual 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.

Assets = Capital + Liabilities

According to Business entity concept, Business is separate legal entity from its
owner thus the amount invested by the owner in the business is liability of the
business is called Captial. Accounting equation thus referred to a equation in
which total assets is always equal to total Liabilities (i.e. Capital + Liabilities)

Assets = Capital + Liabilities

ANALYSIS OF BUSINESS TRANSACTIONS

Business transaction may affect either both sides of the equation or one side of
the equation but the ultimate effect must be equal on the both sides. All the
effects are as follows:-

1. Transaction affecting both sides of the equation: A. Commenced business

with Cash Rs. 3,00,000.

Assets = Capital + Liabilities

Cash Capital

Transactions 3,00,000 = 3,00,000

Explanation:- As Cash is invested by the owner, it should be shown in Capital
(anything which is bring in by the owner is termed as Capital) & Business is

receiving asset in the form of cash, it is to be shown in the Assets side as Cash.