Question
Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
✓
Answer
According to the dual-aspect concept, every transaction simultaneously, has two effects of equal amount, i.e. debit and credit. However, in any case, the equality of total assets with the total claims of business (sum of capital and liabilities) is not disturbed.
This equality is algebraically represented as:
Asset = Total Claims
Or,
Assets = Liabilities + Capital
Or,
Liabilities = Assets - Capital
Or,
Liabilities = Asset − Capital
Or,
Capital = Assets − Liabilities
In any circumstance the above equation cannot be changed. For example,
Business started with cash ₹ 1,00,000
Assets decrease, as cash is invested into the business and capital increases.
Thus the equality between LHS and RHS remains intact.
Goods purchased on credit ₹ 20, 000
Assets increase as well as liability increases, without disturbing the equality.
Goods purchased with cash ₹ 25000
As goods are purchased for cash, so cash balance reduces by ₹ 25,000, but on the other hand, stock balance increases by ₹ 25,000.
Thus the total balance of LHS remains equal to the total claims.
This equality is algebraically represented as:
Asset = Total Claims
Or,
Assets = Liabilities + Capital
Or,
Liabilities = Assets - Capital
Or,
Liabilities = Asset − Capital
Or,
Capital = Assets − Liabilities
In any circumstance the above equation cannot be changed. For example,
Business started with cash ₹ 1,00,000
Assets decrease, as cash is invested into the business and capital increases.
Thus the equality between LHS and RHS remains intact.
Goods purchased on credit ₹ 20, 000
Assets increase as well as liability increases, without disturbing the equality.
Goods purchased with cash ₹ 25000
As goods are purchased for cash, so cash balance reduces by ₹ 25,000, but on the other hand, stock balance increases by ₹ 25,000.
Thus the total balance of LHS remains equal to the total claims.
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₹
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S.No
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₹
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50,000
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ii
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20,000
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10,000
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