The accounting equation is considered to be the foundation of the double-entry accounting system. The accounting equation shows on a company's balance sheet whereby the total of all the company's assets equals the sum of the company's liabilities and shareholders' equity. Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.The financial position of any business, large or small, is assessed based on two key components of the balance sheet, assets, and liabilities.
For example,
- Purchasing a Machine with Cash
Company XYZ wishes to purchase a Rs. 50,000 machine using only cash. This transaction would result in a debit to Equipment (Rs. 50,000) and a credit to Cash (Rs. 50,000). The net effect on the accounting equation would be as follows:
| Assets |
= |
Liabilities |
+ |
Capital |
| 50,000 |
|
|
|
|
| (50,000) |
|
|
|
|
| 0 |
|
0 |
|
0 |
This transaction affects only the assets of the equation, therefore there is no corresponding effect in liabilities or shareholder’s equity in the right side of the equation.
- Purchasing a Machine with Cash and Credit
Company XYZ wishes to purchase a Rs. 50,000 machine but it only has Rs. 25,000 of cash in its holdings. The company is allowed to purchase this machine with an initial payment of Rs. 25,000 but it owes the manufacturer the remaining amount. This would result in a debit to Equipment (Rs. 50,000) and a credit to both Accounts Payable (Rs. 25,000) and Cash (Rs. 25,000). The net effect on the accounting equation would be as follows:
<th scope="col">Assets</th>
<th scope="col">=</th>
<th scope="col">Liabilities</th>
<th scope="col">+</th>
<th scope="col">Capital</th>
|
| 50,000 |
|
25,000 |
|
|
| (25,000) |
|
|
|
|
| 25,000 |
= |
25,000 |
+ |
0 |
This transaction affects both sides of the accounting equation; both the left and right side of the equation increase by Rs. 25,000.
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Sia ? 6 years, 5 months ago
The accounting equation is considered to be the foundation of the double-entry accounting system. The accounting equation shows on a company's balance sheet whereby the total of all the company's assets equals the sum of the company's liabilities and shareholders' equity. Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.The financial position of any business, large or small, is assessed based on two key components of the balance sheet, assets, and liabilities.
For example,
Company XYZ wishes to purchase a Rs. 50,000 machine using only cash. This transaction would result in a debit to Equipment (Rs. 50,000) and a credit to Cash (Rs. 50,000). The net effect on the accounting equation would be as follows:
This transaction affects only the assets of the equation, therefore there is no corresponding effect in liabilities or shareholder’s equity in the right side of the equation.
Company XYZ wishes to purchase a Rs. 50,000 machine but it only has Rs. 25,000 of cash in its holdings. The company is allowed to purchase this machine with an initial payment of Rs. 25,000 but it owes the manufacturer the remaining amount. This would result in a debit to Equipment (Rs. 50,000) and a credit to both Accounts Payable (Rs. 25,000) and Cash (Rs. 25,000). The net effect on the accounting equation would be as follows:
<th scope="col">Assets</th> <th scope="col">=</th> <th scope="col">Liabilities</th> <th scope="col">+</th> <th scope="col">Capital</th>This transaction affects both sides of the accounting equation; both the left and right side of the equation increase by Rs. 25,000.
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