Question

Explain the concept of double entry system and its relationship with accounting equation?

kindly I need the answer written not as a picture.

Answer 1

Double Entry Bookkeeping or accounting means that every business transaction will have effect on minimun of two accounts. It also makes sure that for every debit there should be an equal credit to keep the accounts in balance. Let us take a case for better understanding

Case Purchase of Goods on Credit worth 100

Purchases A/C ...Dr. 100

To Accounts Payable Cr. 100

In this transaction there is an equal debit and credit to make the accounts in balance.

Accounting Equation

Assets = Liabilities + Stockholders Equity

Accounting Equation is also called as the Balance Sheet Equation because it accounts the relationship between assets, liabilities and stock holders equity.

On elaborating Double entry book keeping and accounting equation acts as founding stone for each other. Double Entry works as basis for accounting equation. Both are related to each other in a sense that both follows the same concept that each transaction affects minimum of two accounts and there will always be an equal debit and credit balance.Let us discuss some examples to understand the situation better

Case 1- Business Started With Cash of 50,000

Entry

Cash ....Dr 50,000

To Capital. 50,000

Accounting Equation

Assets = Liabilities + Capital

50,000 = 0 + 50,000

With the transactions there will be increase in cash aka assets by 50000 and in stock holders equity by 50,000 keeping the accounting equation in balance.

The double entry concept makes sure that the accounting equation always remain balance.

Case 2 - Purchases of Furniture on Credit for 10,000

Furniture 10,000

To Accounts Payables 10,000

Accounting Equation after case 2

Assets = Liabilities + Stockholders Equity

60,000 = 10,000 + 50,000

AGAIN the concept of double entry Bookkeeping makes sure that Accounting Equation remains in balance by increasing the LHS by 10,000 and also the RHS by10,000.

So we can conclude by saying that the double entry Bookkeeping is a stepping stone for the balance of Accounting Equation.