What are objectives of accounting equation?Recently, I have talked with Mohammad Mudassir. He is doing MBA second year from Rajasthan University. He is not graduated in commerce. Like him, there are lots of Indian students who are doing MBA but who completed only simple B.A. So, it is sure, all such student will face basic accounting because some part of MBA is of basic accounting.
Mohammed Mudassir from India
Mohammed Mudassir has informed me on the phone that he was also searching the meaning of accounting equation on google because he was confusing to this term. So, he found me site and wrote this question for solution.
Today, I am writing the objectives of accounting equation for the students like Mohammed Mudassir.
1. Base of Whole Accounting Record
Whole accounting record is done on the basis of accounting equation. When you journal entry or ledger accounts, all are done on the basis of accounting rules. These accounting rules are made on the basis of accounting equation. Accounting equation is total assets = capital + total outstanding liabilities. In any journal entry, we have to show this accounting equation. For example, Ram started business with Rs. 5000. In its journal entry
Cash account Dr 5000
Capital account Cr. 5000
asset side cash is showing as Rs. 5000 and other side capital is showing Rs.5000 if we accounting equation from this journal entry.
2. Base of Balance Sheet
If we have to understand balance sheet, we can start it by understanding accounting equation. Accounting equation simplify the balance sheet. Balance sheet is the list of assets and liabilities of organisation. Total of balance sheet will always equal because every asset is made from liability. So, total assets will balance with total liabilities. Accounting equation's principle is the base of this. From accounting equation examples, you can see that every transaction can make equal to the both side of accounting equation.
3. To Understand the Grow of Accounting Equation
We teach accounting equation because you can understand its grow or deepness.
See following grow list
Total Assets = Total Liabilities
Fixed Assets + Current Assets = Capital + Outside Liabilities
Fixed Assets + Current Assets = Capital + Income - Expenses - Drawing + Outside fixed liabilities + outside current liabilities