Accounting Equation

ASSETS = CAPITAL +LIABILITIES

OR
CAPITAL =ASSETS - LIABILITIES

Prepared by : DASRAT THARANI

 Definitions
2

Assets – are resources supplied by the owner for

Business
Liabilities – are resources borrowed from others
Capital – Total resources invested in Business by
Owner . Capital is often called Owner’s Equity or
Shareholder ‘s Equity.
Capital = [Funds invested by owner + any Profits
retained by owner (Retained Earnings)- Dividends
paid out ]

Prepared by : DASRAT THARANI

 Further Explanation of Terms
3
 ASSETS – are of two types
 Fixed Assets (Non current
Assets ): These assets have longer
life (Usually above one year )
For Example: Assets of Land ,
Buildings, Machinery , Furniture
& Fixtures and Vehicles etc.
 Current Assets : assets which have
short life ( up to one accounting
Period i.e one year usually )
For Example: Inventory (Stock ),
Receivables (Debtors) , Bank or
Cash & Pre- paid Expenses
 LIABILITIES: like assets liabilities
are also of two types ;
 Fixed Liabilities (Non current
Liabilities ): The liabilities which
have longer life (Usually above
one year )
e.g Long Term Loans
Current Liabilities: liabilities which
have short life ( up to one
accounting Period i.e. one year
usually )
e.g Short term Loans , Payables
(Creditors) & Accrued Expenses
Prepared by : DASRAT THARANI
 4
The whole double Entry System of
Importance of
Accounting is based on Accounting System .
Accounting
The Accounting equation is based on dual
Equation
concept of Accounting ; it means that every
Always remember following
Rule for Journal Entries :
Accounting Entry has two affects . For
example : when we purchase Motor Vehicle
Always Dr.
on Credit for 1000$ then two things happen:
Increase in :
Motor Vehicle(Asset)Increases & Accounts
Assets
Payable (Liability) also increases & following
Expenses &
Journal Entry is made
Decrease in Liabilities, Motor Vehicle Dr. $1000
Capital & Revenue

Always Cr. Accounts Payable $1000 Cr.

Decrease in Assets , So there is always a Balance going on Between
Expenses & two sides of Accounting Equation due to Dr.
Increase in Liabilities , (Debit) and Credit (Cr.) entries.
Capital & Revenue

Prepared by : DASRAT THARANI