Definition and Explanation of Accounting Equation

1210 words 5 pages
Accounting Equation:
Definition and Explanation of Accounting Equation:
Dual aspect may be stated as "for every debit, there is a credit." Every transaction should have twofold effect to the extent of the same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities. In other words, for every business enterprise, the sum of the rights to the properties is equal to the sum of the properties owned. The properties of the business are called "assets". The rights to the properties are called "equities". Equities may be sub-divided into two principle types: The rights of the creditors and the rights of the owners. The equity
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Thus:
Assets = Liabilities + Proprietorship
Cash Furniture Merchandise Debtors Creditors Riaz, Capital
+ 31,000 + 10,000 + 10,500 + 4,000 = + 4,000 + 51,500
+ 1,000 - 1,000
________________________________________
32,000 +10,000 + 10,500 + 3000 = + 4,000 + 51,500
________________________________________
Transaction 9:
Paid salaries $1,000 in cash. This transaction affected the equation by decrease in a cash asset and decrease in proprietorship (i.e., capital). Thus:
Assets = Liabilities + Proprietorship
Cash Furniture Merchandise Debtors Creditors Riaz, Capital
+ 32,000 + 10,000 + 10,500 + 4,000 = + 4,000 + 51,500
- 1,000 - 1,000
________________________________________
31,000 +10,000 + 10,500 + 3000 = + 4,000 + 50,500
________________________________________
Effects of all the transactions explained above are presented in the following table:
Assets = Liabilities + Proprietorship Cash + Furniture + Merchandise + Debtors Creditors + Riaz, Capital
1 + 50,000 +50,000 ________________________________________ 50,000 = + 50,000
2 - 10,000 + 10,000 ________________________________________ 40,000 10,000 = + 50,000
3 - 10,000 + 10,000 ________________________________________ 30,000 10,000 10,000 = + 50,000
4 + 5,000 + 5,000 ________________________________________ 30,000 10,000 15,000 = 5,000 + 50,000

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