(5) ACCOUNTING EQUATION
Accounting equation The assets and the ownership of those assets of a business are shown in accounting records of that business. All assets should belong to some party of the business. Therefore, assets of a business should be equal to the total ownership of those assets. To show this relationship, an equation is used, which is called as the Accounting Equation. Construction of accounting equation If all assets are financed by the owner of the business, the accounting equation can be presented as follows. Assets = Equity Example :- Amal started a business investing Rs.500 000 in cash. Here, assets (cash) of the business is equal to Rs. 500 000 and this total amount belongs to the owner, Amal. Accordingly, Assets = Equity Rs. Cash 500 000 = Rs. Capital 500 000 When a business expands, the resources invested by owners would not be adequate. Therefore, the business will have to obtain resources from extern...