11 Class Accountancy Rules for Accounting Equations

11 Class Accountancy Rules for Accounting Equations

An Accounting Equation represents the relationship between assets and liabilities of the firm, showing total assets of the firm is equal to the total liabilities and owner’s capital/equity.An Accounting equation is based on the dual aspect concept of accounting. Every transaction has two aspects-debt and credit and affects either both the sides of the equation or one side of the equation only with equal amounts.

Transactions from the accounting equation viewpoint can be divided into two, i.e.,

• Transactions affecting two items

1. Increase in the asset, increase in the liability
2. Decrease in the liability, decrease in the asset.
3. Increase in the asset, increase in the owner’s equity
4. Decrease in the owner’s capital, decrease in the asset.

 Transactions affecting the same side but in opposite direction are:

1. Increase in asset, decrease in another asset
2. Decrease in liability, increase in another liability

• Transactions affecting more than two items.

Some transactions affect more than two items of the accounting equation or a balance sheet.

The procedure to work out an accounting equation is:

1. Analyze the transaction in terms of such variables as assets, liabilities, capital, revenues, and expenses.
2. Decide the effect of the transactionin terms of increase or decrease on variables as assets, liabilities, capital, revenues, and expenses.
3. Record the effect on the relevant side of the equation.

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