Wednesday, January 14, 2009

Basic Accounting Equation

Basic Accounting equation is based on the fact that business recources (Assets) are created through two sources:
• Owner's investment (Capital)
• Getting Loan (Liability)

For instance, Mr. John starts his business with the investment of $100,000. At this stage his books will show the position as:
Assets = $100,000
Capital = $100,000
The equation will show;
Assets = Capital

Afterwards, Mr. John is successful in getting loan from a commercial bank for $500,000. The position of business after getting loan is
Assets = $150,000
Capital & Liabilities = $150,000
It means:
Assets = Capital + Liabilities

1 comment:

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