Ankit Lal Karn, ACW Accounts at Edumarz
The accounting equation describes that the assets of
any business should always be equal to its liability and capital.
A = L+C
Where,
A=Assets
L=Liability
C=Capital
When we are given the information of any two we can find out the third one.
As this equation shows primarily the relationship between the components of the balance sheet, it’s also called the balance sheet equation.
At any given time resources of the firm must be equal to its external and internal liability.
Amount introduced by owner in business is called capital (internal liability)
The claim of outsiders is an external liability. For example- creditors, outstanding salaries
Assets may include cash, debtors, stock, investment, etc.
Example 1:- Ram introduced capital of 10000 rs. In cash.
Here , A = L+C
10000 = 0 + 10000
Example 2:- He purchased the stock of 2000 rs.
So,
Cash + stock = Liability + capital
2000 -2000 = 0 +0
0=0