Question

What is Accounting equation? assets =liability +equity (please link to double entry)

Answer 1

The answer is little detailed-

Accounting equation-

The fundamental accounting equation (or balance sheet equation), shows the relationship between the Assets, Liabilities, and Owner's equity. The accounting equation shows on a company's balance sheet where total of company's assets equals the total of the company's liabilities and owners' equity.

Assets = Liabilities + Owner's/Shareholder’s Equity

Assets - what entity's owns; Liabilities - what entity's owes to others; Owner's Equity - the difference between assets and liabilities

Double entry system of accounting

The double entry system of accounting or book keeping means that for every business transaction the amounts will be recorded in a minimum 2 accounts. The double-entry system also requires that for all transactions, there will be a debit in one account and correspond credit in other account (i.e. Debit amount = Credit Amount). Double Entry Keeps the Accounting Equation in Balance. Double entry also means that the accounting equation (assets = liabilities + owner's equity) will always be in balance.

The accounting equation is considered to be the foundation of the double-entry accounting system. Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,”

Example 1.- Let's say that an entity borrows USD100,000 from the bank. The entity's Cash/Bank Account(Asset) will be increased by $100,000 and Loan (Liability) Account must be increased by $10,000. To increase an asset, there will be a debit entry and to increase a liability, there will be a credit entry. Thus, the Cash A/c will be debited for USD100,000 and the liability Loans A/c will be credited for USD100,000.

i.e. Cash A/c Dr........ 100,000 (Asset Increase)

To Loan A/c 1,00,000    (Liability Increase)

(Being Loan taken from Bank for USD1,00,000)

The accounting equation remained in balance as both assets and liabilities were each increased by USD100,000.

Assets (Increase) = Liabilities(Increase) + Owner's/Shareholder’s Equity

Example 2.If 1,00.000 Capital is introduced in business. Entry will be

i.e. Cash A/c Dr........ 100,000 (Asset Increase)

To Capital A/c 1,00,000   (Capital Increase)

(Being Capital introduced)

Assets (Increase) = Liabilities+ Owner's/Shareholder’s Equity (Increase)