Introduction of Accounting Equation

Accounting Equation is a statement of equality between the debits and the credits. Balance Sheet of an enterprise shows Assets equal to the total of the liabilities plus the capital. It is true because a company's economic resources are financed by its creditors or by its owners capital or by both. The equation may be shown in equal form as follow:

Assets = Liabilities + Capital

OR

Liabilities = Assets - Capital

OR

Capital = Assets - Liabilities

The double entry rule means that in recording a transaction at least two changes must be made in the assets, liabilities or capital. Accounting equation depicts the fundamental relationship among the components of the Balance Sheet. So it is also called Balance Sheet equation. Change in one element results in corresponding change in the same item or in other element. Such change can be summed up as follows:

1. An increase in assets side with corresponding increase in capital.
2. An increase in assets with corresponding increase in liabilities.
3. An increase and decrease in assets.
4. A decrease in assets with corresponding decrease in capital.
5. An increase and decrease in liabilities.
6. An increase and decrease in capital.
7. An increase in capital and decrease in liabilities.
8. An increase in liabilities and decrease in capital.
9. A decrease in assets with corresponding decrease in liabilities.