L-4-ACCOUNTING EQUATION

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CHAPTER 4

ACCOUNTING EQUATION

Dual Aspect concept

The dual aspect concept states that every business transaction involve two different accounts. This concept is the basis of double entry accounting. The concept is derived from the accounting equation, which states that:

Assets = Liabilities + Equity

Accounting equation

The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet.

The equation is as follows: Assets = Liabilities + Capital.

This equation sets the foundation of double entry accounting and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affect both sides of the accounting equation. For every change to an asset account, there must be an equal change to a related liability or Capital. It is important to keep the accounting equation in mind when performing journal entries.

The balance sheet is broken down into three major sections and their various underlying items: Assets, Liabilities, and Capital. Below are some examples of items that fall under each section:

Assets: Cash, Stock, Machinery, Debtors

Liabilities: Creditors, Bank Loan

Capital: Capital, Reserves.

The accounting equation shows the relationship between these items.

Rearranging the Accounting Equation. The accounting equation can also be rearranged into the following form:

Capital = Assets – Liabilities

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