Accountancy · Chapter 2
Study notes aligned to the official NEB syllabus.
The relationship of the different assets, capital, and liabilities of a business, expressed mathematically in equation form, is called the accounting equation. The accounting equation shows that the total of assets is always equal to the total of capital and liabilities.
$$\text{Assets} = \text{Capital} + \text{Liabilities}$$
OR
$$\text{Assets} = \text{Owner's Capital} + \text{Liabilities}$$
Every transaction of a business affects this equation in such a way that the two sides always remain equal. This is the basic idea behind the double entry system: every transaction has a dual effect, and after recording that effect, assets must still equal capital plus liabilities.
| S.N | Transaction | Assets | = | Capital | + | Liabilities |
|---|---|---|---|---|---|---|
| Business started with cash | + 1,00,000 | = | + 1,00,000 | + | 0 | |
| Beginning Equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| a) | Goods purchased for cash | + 10,000 / - 10,000 | = | 0 | + | 0 |
| New equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| b) | Sold goods for cash | + 5,000 / - 5,000 | = | 0 | + | 0 |
| New equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| c) | Salary paid | - 10,000 | = | - 10,000 | + | 0 |
| Ending Equation | 90,000 | = | 90,000 | + | 0 |
Goods purchased for cash and goods sold for cash (at cost) simply convert one asset (cash) into another (stock) and back, so total assets, capital, and liabilities stay unchanged in those two steps. Only the cash payment of salary (an expense) reduces both assets and capital.
The relationship of the different assets, capital, and liabilities of a business, expressed mathematically in equation form, is called the accounting equation. The accounting equation shows that the total of assets is always equal to the total of capital and liabilities.
OR
Every transaction of a business affects this equation in such a way that the two sides always remain equal. This is the basic idea behind the double entry system: every transaction has a dual effect, and after recording that effect, assets must still equal capital plus liabilities.
| S.N | Transaction | Assets | = | Capital | + | Liabilities |
|---|---|---|---|---|---|---|
| Business started with cash | + 1,00,000 | = | + 1,00,000 | + | 0 | |
| Beginning Equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| a) | Goods purchased for cash | + 10,000 / - 10,000 | = | 0 | + | 0 |
| New equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| b) | Sold goods for cash | + 5,000 / - 5,000 | = | 0 | + | 0 |
| New equation | 1,00,000 | = | 1,00,000 | + | 0 | |
| c) | Salary paid | - 10,000 | = | - 10,000 | + | 0 |
| Ending Equation | 90,000 | = | 90,000 | + | 0 |
Goods purchased for cash and goods sold for cash (at cost) simply convert one asset (cash) into another (stock) and back, so total assets, capital, and liabilities stay unchanged in those two steps. Only the cash payment of salary (an expense) reduces both assets and capital.