Accounting Equation¶

The Accounting Equation¶

The basic accounting equation is:

Assets = Liabilities + Owner's Equity

This can be expanded to include revenue and expenses:

Assets = Liabilities + (Equity Share Capital + Revenue - Expenses - Dividends)

This expanded equation shows how revenue increases owner's equity (profit) and how expenses and dividends decrease it.

Screenshot (389)

Let's illustrate with the transactions described:

1. Initial Investment:

2. Bank Loan:

3. Purchase of Shop:

4. Shop Furnishing:

5. Purchase of Garments (Cash):

6. Purchase of Garments (Credit):

7. Sales (Cash):

8. Payment to Grasim Ltd.:

9. Salary Payment:

10. Maintenance Payment:

Using the above transactions, we can prepare the income statement and balance sheet.

Account Balances:

Income Statement:

Balance Sheet:

Assets	Amount (₹ lakhs)	Liabilities & Equity	Amount (₹ lakhs)
Cash	85	Loan	50
Building	20	Equity Share Capital	100
Furniture	5
Goods/Inventory	40
Total Assets	150	Total Liabilities & Equity	150