/** * The main template file * * This is the most generic template file in a WordPress theme * and one of the two required files for a theme (the other being style.css). * It is used to display a page when nothing more specific matches a query. * E.g., it puts together the home page when no home.php file exists. * * @link https://developer.wordpress.org/themes/basics/template-hierarchy/ * * @package WordPress * @subpackage Tally * @since 1.0.0 */ ?>
The accounting equation summarizes the essential nature of double-entry system of accounting. Under which, the debit always equal to credit, and assets always equal to the sum of equities and liabilities. Accounting equation can be simply defined as a relationship between assets, liabilities and owner’s equity in the business.
The accounting equation connotes two equations that are basic and core to accrual accounting and double-entry accounting system.
The following are two basic rules of accounting equation that distinguishes the accrual system of accounting from cash basis accounting, and single-entry system from the double-entry system:
It derives its status only from the accrual system of accounting and thereby, it does not apply in a cash-based, single-entry accounting system.
It is pertinent to note that the term basic accounting equation is another name for the ‘Balance Sheet Equation’. The reason balance sheet always balances is because of the following equation:
Assets = Liabilities + Owners Equities
The ingredients of this equation - Assets, Liabilities, and Owner's equities are the three major sections of the Balance sheet. By using the above equation, the bookkeepers and accountants ensure that the "balance" always holds i.e., both sides of the equation are always equal.
The accounting equation represents an extension of the ‘Basic Equation’ to include another fundamental rule that applies to every accounting transaction when a double-entry system of bookkeeping is used by the businesses.
Debits = Credits
This Accounting Equation summarizes the following:
This equation serves to provide an essential form of built-in error checking mechanism for accountants while preparing the financial statements.
The entire financial accounting depends on the accounting equation which is also known as the ‘Balance Sheet Equation’. The following are the different types of basic accounting equation:
This balance sheet equation tells you that all the assets owned by the business are either sponsored using the owners’ equity or the amount which company should owe others like suppliers or borrowings like Loans
The difference of assets and owner’s investment into business is your liabilities which you owe others in the form of payables to suppliers, banks etc.
This equation reveals the value of assets owned purely by owner equity.
While trying to do this correlation, we can note that incomes or gains will increase owner’s equity and expenses, or losses will reduce it.
Let us understand the accounting equation with the help of an example.
Mr Ram, a sole proprietor has the following transactions in his books of accounts for the year 2019.
Amount ( in Indonesian Rupiah)
Date |
Transactions |
Assets = |
Liabilities + |
Owner’s Equity (Capital) |
01.01.19 |
Capital brought into the business 20,000 |
20,000 |
- |
20,000 |
02.01.19 |
Purchased goods on credit from Dad & Co., 2,000 |
+ 2000 |
+ 2,000 |
- |
|
Revised equation |
22,000 = |
2000 + |
20,000 |
04.01.19 |
Bought plant and machinery for cash 8,000 |
+8,000 |
- - |
- - |
|
Revised equation |
22,000 = |
2000 + |
20,000 |
08.01.19 |
Purchased goods for cash 4000 |
+4,000 |
- - |
- - |
|
Revised equation |
22,000 = |
2000 + |
20,000 |
12.01.19 |
Sold goods for cash (cost of inventory 4,000 + Profit 2,000) 6000 |
+6,000 |
- - |
+2,000 |
|
Revised equation |
24,000 = |
2000 + |
22,000 |
18.01.19 |
Paid to Das and Co., in cash 1,000 |
-1,000 |
-1,000 |
- |
|
Revised equation |
23,000 = |
1000 + |
22,000 |
22.01.19 |
Received from Mr Y 300 (being a debtor) |
-300 |
- - |
- - |
|
Revised equation |
23,000 = |
1000 + |
22,000 |
25.01.19 |
Paid salary 6,000 |
-6,000 |
- |
-6,000 |
|
Revised equation |
17,000 = |
1000 + |
16,000 |
30.01.19 |
Received interest 5,000 |
+5,000 |
- |
+ 5,000 |
|
Revised equation |
22,000 = |
1000 + |
21,000 |
31.01.19 |
Paid wages 3,000 |
-3,000 |
- |
-3,000 |
|
Revised equation |
19,000 = |
1000 + |
18,000 |
test
E-invoice solutions from our ecosystem
Analysing Business Reports Just Got Easier with TallyPrime
TallyPrime’s Amazing Invoicing Experience
TallyPrime’s ‘Go To’ – A Powerful Capability to Discover Easily and Do More
Tally’s Exception Reporting to Address Data Anomalies