Accounting Equation: Assets, Liabilities, Capital and Owners Equity

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Accounting Equation

The business transactions are recorded in the books of accounts is based on a fundamental equation is called Accounting Equation. All business transactions are recorded by considering the dual aspect of accounting into picture. The owner/proprietor of the business brings capital into the business, in turn the business purchases assets for the organisation, thus it implies that,

Capital = Assets. It is completely based on the dual aspect concept of accounting which have discussed in the lesson 2 of accounting.

In accounting this equation is broadly followed such as:

In Accounting this Equation is Broadly Followed Such As
In accounting this equation is broadly followed such as

Assets = Liabilities + Capital

Assets – Liabilities = Capital

Assets = Liabilities + Owners equity

Assets and Liabilities

Note: To understand the assets and the liabilities, the following items are to be identified in the view point of accounting, which are as follows:

Identified in the View Point of Accounting
identified in the view point of accounting



Land and Buildings


Plant and Machinery

Loans and advances

Furniture and Fixtures

Bank overdraft




Bills Payable

Bills Receivable

Outstanding expenses

Cash in hand, Cash at Bank

Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Capital Credit Debit

Revenue Credit Debit

Expenses Debit Credit

Note: Accounting information should be relevant, reliable, comparable, understandable, timely and complete.

Accounting can be cash based or accrual system. In cash system, the entries are passed only when the cash is received, but in accrual system the transactions are recorded on the basis of amounts having become due for payment.

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