Question

Please write a summary to discuss the Fundamental Accounting Equation.

Around 300 hundred words.

Answer 1

The fundamental accounting equation is also known as the balance sheet equation and it shows the relationship between assets, liabilities, and capital(owner's fund) of business. The double-entry system of Bookkeeping is based on the accounting equation, which means debit is equal to the credit of any transaction.

The fundamental accounting equation is

Assets = Liabilities + Capital(Owner's fund)

Capital (Owner's fund/Equity) means the amount of money that the owner has invested in the business.

Evet transaction that happens in the business is recorded in books of accounts by this Accounting equation.

Some important facts of the equation

• The left side is referred to as a debit side
• The right side is referred to as the credit side
• The equation must be equal

This means from the above discussion we can understand that every transaction, both side of this equation has equal and net effects.

Let's understand it by few examples

1.Acquisition of machine with cash

ABC ltd purchased $1000 of the machine by paying cash. the transaction will result in a credit to machine($1000) and debit to cash outflow( -$1000)

Assets = Liabilities + Capital(Equity holders)

+$1000

-$1000   

0 = 0 + 0

let's take another example

Machine purchased by ABCltd for $500. The company has paid to cash only$250 and the remaining $250 is remaining to be paid to the manufacturer. This means a credit to Machine ($500), a credit to account payable($250) and debit to cash ($250)

Assets = liabilities + Capital(oWNER'S FUND)

+$500

- $250     = + $250$

+$250

= +$250

The accounting equation is representative of how assets, liabilities, and owner's equity are related to each other.