Notes of chapter Accounting equation Class 11
It is an equation that signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity). It is also called the balance sheet equation as the accounting equation depicts the fundamental relationship among the components of the balance sheet.
It can be expressed as:
Total Sources = Total Resources
or
Assets = Capital + Liabilities
Total sources represent the funds that are generated by a business. The sources are of two types, internal and external sources. Internal sources belong the funds invested by the owner(s) in the business known as capital whereas, external sources are the funds that are raised by a business from the outsiders known as liabilities.
All these sources are normally in the form of cash at the initial stage and are converted into various kinds of assets later. The sum of all assets is known as resources. Thus, the accounting equation is a statement of equality between the sources and resources and the sources that finance the resources.
Calculation of Profit and Loss under Accounting Equation
Profit or Loss = Capital at the End + Drawings – Capital Withdrawn
+ Further Capital Introduced – Capital in the Beginning
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