About Accounting System

Accounting Equation

The accounting equation is the basis for double entry system of accounting. Total assets of the business unit are provided by the Creditors/lenders and owners. Therefore at any given point of time the total assets of the business are equal to liabilities. Liabilities to the outsiders are known as liabilities, but liabilities to the owners in accounting is referred to “CAPITAL”
The relationship of the Assets, liabilities, and owners equity can be expressed as follows;
Total Assets = Total Liabilities
OR
Total Assets = Outsiders claim against the Assets+ Owners Claim Against the assets
OR
Total Assets = Liabilities + Capital
OR
Total Assets – Liabilities = Capital
Assets and Liabilities are two independent variables and Capital is dependant variable, for it is the difference between Assets and Liabilities. A business transaction may affect
Either both sides of the equation by the same amount or one side of the equation only, by both increasing or decreasing it by equal amounts and netting to Zero, An increase in an asset, without a corresponding increase in liability or corresponding decrease in other asset, must increase in Capital. Conversely, an increase in liability without a corresponding increase in asset, or corresponding decrease in another liability, will indicate a decrease in Capital.

Example 1:
If the business is Rs 75,000 and the Capital is Rs 85,000 Find out the total Assets.
Solution:
Total Assets – Liabilities = Capital
OR
Total Assets = Liabilities+ Capital
OR
Total Assets = Rs 75,000 +Rs 85,000 = Rs 160,000














Example 2:
A business unit has Cash Rs 10,000. Stock Rs 15, 000, Building Rs 10,000,
Machinery Rs 1, 80, 000, Debtor of Rs 45,000 and Creditor of Rs 27,500
What is the Total Capital of this Business?
Solution:
Total Assets – Liabilities = Capital
OR
As Total Liabilities = the only Creditor (in this case) =27,500
And Assets = Cash+ Stock+Building+Machinery+Debitor
Total Assets = 10,000+15,000+10,000+1, 80,000+ 45,000
= 260,000
Capital = Total Assets – Total Liabilities
Capital = 260,000-27,500 =232,500
So the total Capital is Rs 232,500