accounting equation

📘 Accounting Equation

The Accounting Equation is the foundation of double-entry bookkeeping.
It shows the relationship between a business’s assets, liabilities, and owner’s equity.

🔹 Basic Formula
Assets
=
Liabilities
+
Owner’s Equity
Assets=Liabilities+Owner’s Equity
🔹 Meaning of Each Term
Term Meaning
Assets Everything the business owns (cash, buildings, inventory, etc.)
Liabilities Everything the business owes to outsiders (loans, creditors, etc.)
Owner’s Equity (Capital) The owner’s investment or claim on the business after paying liabilities
🔹 Why It Always Balances

Every transaction affects two sides of the equation —
so the total value of Assets will always equal the total of Liabilities + Equity.

🔹 Example 1: Starting a Business

Owner invests ₹1,00,000 cash.

Assets = Liabilities + Owner’s Equity
₹1,00,000 (Cash) = ₹0 + ₹1,00,000 (Capital)

✅ Equation balances.

🔹 Example 2: Buying Furniture for Cash (₹10,000)
Assets = Liabilities + Owner’s Equity
(Cash ↓ ₹10,000, Furniture ↑ ₹10,000) = ₹0 + ₹1,00,000

✅ Total assets remain ₹1,00,000 — equation still balances.

🔹 Example 3: Buying Goods on Credit (₹20,000)
Assets = Liabilities + Owner’s Equity
₹1,20,000 (Goods) = ₹20,000 (Creditors) + ₹1,00,000 (Capital)

✅ Equation: ₹1,20,000 = ₹1,20,000 ✔️

🔹 Example 4: Owner Withdraws ₹5,000 (Drawings)
Assets = Liabilities + Owner’s Equity
₹1,15,000 = ₹20,000 + ₹95,000 (Capital – Drawings ₹5,000)

✅ Equation still balanced.

🔹 Alternate Forms of the Equation

\text{Owner’s Equity} = \text{Assets} - \text{Liabilities}
]

When including Revenue and Expenses:

Assets
=
Liabilities
+
Capital
+
Revenue
−
Expenses
−
Drawings
Assets=Liabilities+Capital+Revenue−Expenses−Drawings