The accounting equation is the dual aspect concept written as a formula:
Assets = Liabilities + Capital
Capital can also be written as Assets − Liabilities. Profit increases capital; losses and drawings reduce it.
Effect of common transactions
| Transaction | Assets | Liabilities | Capital |
|---|---|---|---|
| Started business with cash ₹1,00,000 | + Cash 1,00,000 | — | + 1,00,000 |
| Bought goods on credit ₹20,000 | + Stock 20,000 | + Creditors 20,000 | — |
| Sold goods costing ₹10,000 for ₹14,000 cash | + Cash 14,000, − Stock 10,000 | — | + Profit 4,000 |
| Paid rent ₹3,000 | − Cash 3,000 | — | − 3,000 |
| Withdrew cash for personal use ₹2,000 | − Cash 2,000 | — | − 2,000 |
After every transaction, total assets must still equal liabilities plus capital. If they do not, one of the two effects has been missed.
Practice tip
Write a running table with one column per asset and liability. It is the fastest way to check your understanding before moving to the journal.
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