Accounting Equation

 Accounting equation

The accounting equation is the basic element of the balance sheet and the primary principle of accounting. It helps the company to prepare a balance sheet and see if the entire enterprise’s asset is equal to its liabilities and stockholder equity. It is the base of the double-entry accounting system.

The accounting equation on the basis of a balance sheet can be calculated as

  • The business total assets should be located on the balance sheet for a particular period
  • The liabilities of a company should be listed separately in the balance sheet and calculated
  • The total liability and total stockholder’s equity should be added
  • The total liabilities and equity will equal the company’s asset
The Formula for the Accounting Equation

Assets = Liabilities + Shareholder’s Equity

Example of Accounting Equation:

For the budgetary year, leading retailer ABC firm incorporated the following points on its balance sheet:
Total assets: ₹190 crore
Total liabilities: ₹130 crore

Total shareholders’ equity: ₹60 crore
If we evaluate the accounting equation (Liabilities + Equity), we arrive at (₹130Cr + ₹50Cr) = ₹190 crore, which equals to the calculation of the assets submitted by the company


 The accounting equation is considered as fundamental basis on which all accounting systems function. Rightfully so, it is considered as the main underlying framework that helps companies to organize their systems.
 So that they can successfully can be able to extend the advantages and utility derived by effective accounting systems.

Author: Nazia Tabassum 

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