Accounting Equation: Formula of Accounting with Example

Accounting Equation: The accounting formula that is the foundation of double entry accounting. The accounting equation shows that all assets are either funded by obtaining cash or paying with the cash of the company’s shareholders. Thus, the accounting equation is: Assets = Liabilities Shareholder Equity. All business transactions are recorded as having a double aspect. At any point of time, a firm will have things which may either be sold or converted into cash or which may be later utilized for a relatively long time.

All these things are called properties. Thus, Capital = Properties.

Formula of Accounting

Accounting Formula represents that amount of resources (possessions) amounts to the responsibilities (capital and liabilities) of business.

The whole Financial Accounting depends upon Accounting Formula which is likewise known as Balance Sheet Formula. The standard Accounting Formula is:

Assets = Liabilities Owner’s equity

• or A = L P
• or P = A– L Where A = Assets, L = Liabilities, P = Capital
• or L = A– P

While attempting to do this correlation, please note that incomes or gains will increase owner’s equity and expenses or losses will reduce it.

Trainees are encouraged to go through the following illustration to comprehend this formula properly.

In case the capital contributed by the proprietor is insufficient, business takes loaning from other parties or outsiders. These parties may give loan or permit credit facilities at the time of purchase of items. The quantities which are owed to outsiders and which have to be paid, faster or latter are called liabilities. For example: Loans, Bank Overdraft, Creditors, Expenses Payable, and Outstanding Expenditures etc. On the one hand, the loan offered by the outside celebrations increases the properties of the business, on the other hand, claims of financial institutions and lender of money on the assets of the business increase.

Thus, the amount of resources (assets) = obligations (capital liabilities)

For That Reason, Capital Liabilities = Assets; or

Capital = Assets– Liabilities.

This formula is understood as accounting equation.

Example

Example: Expect A starts an organization with a capital of Rs 50,000, right away the company will have Rs 50,000 as cash as possession and at the exact same time the company will owe to the owner Rs 50,000 which is taken as the owner’s capital. Therefore,

Capital (Rs 50,000) = Properties Rs 50,000(Cash).

If the firm purchases furniture worth Rs 10,000 out of the cash offered by A, the circumstance will be:

Capital (Rs 50,000) = Money (Rs 40,000) Furnishings (Rs 10,000).

Subsequently, if business borrows Rs15,000 from a bank, the position will be as follows:

Capital (Rs 50,000) Bank loan (Rs 15,000) = Money (Rs 55,000) Furnishings (Rs 10,000).

Advised

• Accumulated Liabilities
• Capital Structure
• Book Keeping
• Interest on Capital
• Accounting Quotes
• Double Entry System
• Capital Losses and Revenue Losses
• Capital Expenditure and Income Expenditure
• Capital Invoices and Income Receipts