Learn Accounting Equations On Your Own:

The fundamentals of Double Entry system of book-keeping state that every debit has to have a corresponding credit. It is also called accounting equation and the formula represents the relationship between the assets, liabilities, and owners' equity of a business.

Accounting Equations:

This equation reflects that the value of a company's assets is always equal to the sum of its liabilities and owners' equity.

A=E

Where,

A denotes Assets and

E denotes Equities.

            Assets are items owned by the firm that can be converted or liquidated into cash)

            Equities or liabilities are claim against assets and indicate the source of assets. The source may be owners own investment into business or outsiders or creditors who invested into the business. This result in the difference in the nature of claims and due to this difference, the accounting equation may be expanded into:

A=L+C

Where,

L denotes liabilities or claim against the assets, or legal obligations to pay off the creditors and

C denotes owner's equity or capital or amount or asset which is invested by the proprietor.

Example:

If "A" starts business with 25000 in cash, the equation will be:

Assets = Equities

            If he purchase goods worth 10000 on credit. The equation will be

Assets = Liabilities + Capital

Cash 25000 + stock 2000 = Creditor 10000 + Owner's equity 25000

In case of liquidation, the owner will not have any claim on assets until all the claims of the creditors are met or paid off. So capital is also sometimes referred to as residual.

            From this point of view, the accounting equation can be expressed as:

Assets-Liabilities=Capital

            Because of this residual nature, the capital of the business may increase or decrease depending upon the success or failure of the business. If the business is making profit, the claim of the owner will increase or vice versa. This success or failure of business is reflected in the income statement and balance sheet of the firm which is periodically prepared.