**CONCEPT OF ACCOUNTING EQUATION**

One of the important features of

**double-entry book-keeping**is that it makes a two-fold or double effect. It implies that every financial transaction has a simultaneous effect on two separate accounts. Such an effect is always of an equal amount. This gives rise to the fundamental principle of the double-entry system. That is, 'For every debit, there is a corresponding credit or '**, or 'Debit = Credit and Credit = Debit' With this fundamental principle, a relationship between three basic elements of accounting can be developed. The three basic elements of the accounting equation are***vice versa***assets, capital,**and**liabilities.**The relationship between the elements can be shown in the form of a mathematical equation. This equation is called the accounting equation.**MEANING AND DEFINITIONS OF ACCOUNTING EQUATION**

The

**accounting equation**is a mathematical statement showing that two amounts or values accounting statement are equal, such as assets = equities. The accounting equation is also called the balance sheet equation, as it represents a mathematical expression of the relationship between the two balance sheet items of the business. Formally, therefore, the accounting equation is a statement of equality between total assets and total claims or the equities of the business. a**ccounting basic terminologies.**Mathematically,

**Assets = Total claims or equities**

**or, Assets = Owners' claim or equity + Outsiders' claim or equity**

**or, Assets = Capital + Liabilities**

**or, Capital = Assets - Liabilities**

**or, Liabilities = Assets - Capital**

**COMPUTATION OF ACCOUNTING EQUATION**

The accounting equation shows that at any point in time the total assets of a business are always equal to the total of its capital and liabilities. If by a financial transaction, there is a change in the amount of assets, there must be a corresponding change in the amount of either capital or liabilities or both. Therefore,

**double-entry book-keeping**can also be seen as mainly a set of rules by which an increase in assets is connected with a corresponding decrease or with the balancing increase and/or decrease in equity. The set of rules can be stated in the following manner:- An increase in the amount of assets with a corresponding decrease in the amount of assets.

- An increase in the amount of assets with a corresponding increase in the amount of capital or liabilities, or both.
**Basic Accounting Concepts -**

- A decrease in the amount of assets with a corresponding increase in the amount of assets.

- A decrease in the amount of assets with a corresponding decrease in the amount of capital or liabilities, or both.

- An increase in the amount of capital with a corresponding increase in the amount of assets.

- An increase in the amount of capital with a corresponding decrease in the amount o liabilities.

- A decrease in the amount of capital with a corresponding decrease in the amount of assets.

- An increase in the amount of liabilities with a corresponding increase in the amount of assets.

- An increase in the amount of -liabilities with a corresponding decrease in the amount of liabilities.

- A decrease in the amount of liabilities with a corresponding decrease in the amount of assets. These rules will be even clearer when they are illustrated with examples in the following section.

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