Accounting equation
- Accounting equation may be understood as the relationship between total Assets and total outsider liability and owners equity.
- Accounting equation = Total Assets = Outside liabilities + owners equity.
- Assets are what the business owns.
- Liabilities including capital are what the business owes to the outsiders and the owner.
- The money/fund introduced by the owner or proprietor is termed as Capital.
- Money or fund procured from outside sources like blanks, financial institutions, relatives or friends are called borrowings or outside liabilities.
- When the borrowing is to be paid within a short period of one year it is called, short term liability or short term loan or current liabilities.
- Similarly when the borrowing is to be repaid in a longer period of more than one year it is termed as long term liability or long term loan.
- Total fund raised either by way of owners contribution or borrowing from outsiders can be invested either in the form of long term fixed Assets or short term assets /current Assets.
- As per double entry system every transaction has two fold effects affecting assets and liabilities in such a way that the accounting equation Assets = outside liability + owners equity is satisfied.
- The Accounting equation can be rewritten as = Enquiry + long term liabilities + current liabilities = Fixed Assets + Current Assets.