Accounting Equation

Accounting Equation is also called Balance Sheet Equation. It is a basic concept of agreement between left-hand and right-hand site and starting pint of double entry. Double Entry Accounting states that for every debit entry there should be pass a credit entry. Every transaction has twofold effect; this concept has a result of accounting equation or fundamental equation. At any point of time total Assets must be equal to equities. In other words we can say that left hand side which is resource side must be equal to right hand side which is of course source side.

 Asset =  Liabilities + Owner Equity



Assets = Equities / Claims



Resources = Sources


 Left hand side = Right hand side

accounting equation

Different Presentation of Accounting Equation

There are different style of presentation mention below for balance sheet equation:

balance sheet equation

>> Practice Questions with the help of Accounting Equation Format.

Four Effects of Transactions

Accounting Transaction is broadly classified into four categories:

assets and liabilities

Expanded Accounting Equation

The Expanded Accounting Equation of sole proprietorship and partnership is Accounting Equation (Assets = Liabilities + Owner’s Equity) – Expenses + Revenue – Drawings Account.

In case of company business the expanded accounting equation in the balance sheet equation (Assets = Liabilities + Stockholders’ Equity) with replacement of Stockholders’ Equity with Paid-in Capital – Expenses + Revenues – Treasury Stock – Dividends.

> > Practice Accounting Equation Problems and Solutions.  


Example # 1:

For each of the following transactions indicate the effects i.e. (Increase, Decrease, Conversion or No Effect)?

balance sheet equation


basic accounting equation


assets = liabilities + equity


the accounting equation


Example # 2:

From the list of accounts below, determine which assets are and which equities are.  List the assets under the Asset Column and the equities under the equities Column.  Then add each column and complete the Fundamental Accounting Equation?

Accounts Asset Equities
Cash Rs. 5,000 Rs. 5,000
Accounts Receivable 10, 600 10,600
Building 35,000 35,000
Accounts Payable 5,000 5,000
Inventory 200 200
Computer Equipment 18,000 18,000
Bank Loan 6,000 6,000
Mortgage Payable 10,000 10,000
Owner Equity 47,800 47,800
TOTAL Rs. 137,600 Rs. 68,800 Rs. 68,800


>> Try more Accounting Equation Examples.


Example # 3:

For each of the following equations, a figure is missing.  In the space provided, please supply the missing figure that will balance the equation.

Assets Liabilities Owner’s Equity
100 20.00 80
790 720 70
2,000 400 1,600
11,218 10,000 1,218
1,010 25 985
340 12 328
8793 0 8793
2,000 1,501 499


>> Practice Accounting Equation Quiz 1 and Quiz 2.


Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.

Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.

Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.

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