Question

What is accounting equation?

Answer 1

Answer

• Accounting Equation is the basis of Double Entry System.
• According to the double entry system, the accounting equation should balance after each transaction. This means that “left side must always be equal to the right side” rule applies.
• Simple Accounting Equation is written as : ASSETS = LIABILITIES + EQUITY.
  The same can be interpreted as Assets – Liabilities = Equity,
  or Assets – Equity = Liabilities
• The equation has to balance after every transaction.
• This results in Debit side being equal to Credit side, and Balance Sheet’s total being equal.
• For example, if a transaction involves say “Cash borrowed, and Notes issued for $ 20000”
  This will increase ‘Asset’ balance, while also increasing the ‘Liabilities’ balance.