You can also visit our website, www.iedubook.com to watch many more videos on Accountancy prepared by CA. Arinjay Kumar Jain. Have a happy
learning.
Accounting equation forms the basis or the foundation
for the double entry bokk-keeping
system. According to this equation, for each and transaction, the total debits equal the
total credits.
It is also represented as under :
-
Assets =
Liabilities + Capital
Impact on Accounting
Equation - Introduction of Capital in
business
When capital is introduced in Business, Cash
available with the business increases. An increase in asset is debited and
added to the asset side. Similarly, the business owes the same amount to owners
for capital and this amount is credited, and hence shown on other side of
Accounting equation.
|
Impact on Accounting
Equation for Salary payments
|
Payment of Salary in cash reduces the Asset side
of the Accounting Equation. Similarly, given that Salary is an expenditure, on
a standalone basis without any income it would increase the loss of the
Business and reduce the Capital of owners.
Impact
on Accounting Equation - Purchased Plant and Machinery in Cash Credit
Purchase of Plant and Machinery in Cash or Credit would increase the Asset
available in Business, namely Plant and Machinery and hence be Increased in the
asset side by that Amount. When its purchased in cash, it would reduce cash
balance on Asset side. On the other hand, when purchased on credit, it would
increase the liability to the Supplier of Plant and Machinery
Impact on Accounting
Equation - Capital withdrawn by owners
When the owners of business withdraw capital,
Cash is reduced from the Asset side to that extent since its paid to the
owners. At the same time, since amount due to owners from Business is reduced,
capital account of the owners is also reduced by an equal amount
