Accounting equation is the base of double entry bookkeeping and the double entry bookkeeping is the base of whole of the modern accounting system. Therefore accounting equation is the starting point to understand double entry bookkeeping. Simply we can say every transaction has double effect, in other words every transaction always affects two accounts. Therefore accounting equation always remains in balance. This doesn’t mean that every transaction always affects both sides of the equation but it can affect only one side. So that if the transaction is affecting only one side of the equation then there must be increase in one account and decrease in the other one keeping balance on both sides.
Accounting Equation in it’s simplest form can be written as;
Either it’s sole proprietary, partnership or company in every form of businesses assets represent all of the resources available to the entity. Those resources which are bought by the owners of the entity are shown as capital in the accounting equation, and those resources which are owned by other than owners of the entity are represented by liabilities in the accounting equation.
Therefore if all of the assets are bought by owners of the entity from their own pocket then the equation can be written as;
Assets = Capital
We all know that resources are scarce, therefore liabilities are generally exist in accounting equation.
Let’s see how it works. Suppose Jennifer Jack is going to start laptop sales shop. For this she bought the shop for $10000 from hes own pocket and got 20 laptops at the price of $200 per laptop from a supplier on credit for which she will pay later. Now Jennifer Jack’s business has assets of $14000 ($10000+$4000). We can write it in the form of accounting equation as follows
$14000 = $4000 + $ 10000
$14000 = $14000
To learn how changes affect accounting equation, continue reading changes in accounting equation