# Accounting Equation Solved Problems for Class -11 (TS Grewal)

The accounting equation is like the foundation of a house, supporting everything built on top of it. In simple terms, it shows that everything a company owns (its assets) is funded either by what it owes (its liabilities) or by what the owners have invested (its equity). The accounting equation, fundamental to the double-entry accounting system, stipulates that a company’s total assets equal the sum of its liabilities and shareholders’ equity. This relationship ensures that the balance sheet remains balanced, as each debit entry has a corresponding credit entry. Also known as the basic accounting equation or the balance sheet equation, it illustrates how assets, liabilities, and equity interrelate. Assets are the valuable resources a company controls, whereas liabilities are its obligations. Both liabilities and shareholders’ equity indicate how a company finances its assets. Debt financing appears as liabilities, while equity financing through issuing shares is reflected in shareholders’ equity. The accounting equation helps verify that business transactions are accurately represented in the company’s books. Key components of the balance sheet include assets, liabilities, and shareholders’ equity, which together depict the financial position of the business. The equation looks like this:

Assets=Liabilities + Equity

Imagine you start a small business. The money you put into the business is your equity. If you take out a loan to buy equipment, that loan is a liability. The equipment you buy is an asset. The accounting equation helps you keep track of these elements, ensuring that everything is balanced. This means that for every dollar of assets, there is an equal amount of liabilities and equity combined.

This equation is crucial because it forms the basis of the double-entry bookkeeping system, where every transaction affects at least two accounts. By understanding and using the accounting equation, businesses can ensure their financial records are accurate, making it easier to see where the money is coming from and where it’s going.

The accounting equation is the cornerstone of the double-entry bookkeeping system, forming the foundation of modern accounting practices. It provides a clear framework for understanding how different financial elements of a business interact. The equation can be expressed as:

This equation ensures that a company’s balance sheet remains balanced, reflecting the financial health of the business. Let’s break down each component of the accounting equation to understand its significance and interplay.

#### 1. Assets

Assets are resources owned by a company that have economic value and can be converted into cash. They are used to generate revenue and are expected to provide future economic benefits. Assets are typically classified into two categories:

• Current Assets: These are short-term assets that are expected to be converted into cash or consumed within a year. Examples include cash, accounts receivable, inventory, and short-term investments.

• Non-Current Assets: These are long-term assets that are expected to provide economic benefits over a period longer than a year. Examples include property, plant, equipment, long-term investments, and intangible assets like patents and trademarks.

#### 2. Liabilities

Liabilities represent the obligations or debts that a company owes to outside parties. They are claims against the company’s assets and must be settled over time through the transfer of money, goods, or services. Liabilities are also classified into two categories:

• Current Liabilities: These are short-term debts that are due within a year. Examples include accounts payable, short-term loans, and accrued expenses.

• Non-Current Liabilities: These are long-term debts that are due after a year or more. Examples include long-term loans, bonds payable, and deferred tax liabilities.

#### 3. Equity

Equity, also known as owner’s equity or shareholders’ equity, represents the residual interest in the assets of the company after deducting liabilities. It reflects the owners’ stake in the company and can be calculated as:

Equities= Assets−Liabilities

Equity can be further broken down into:

• Common Stock: The value of the shares issued to shareholders.

• Retained Earnings: The cumulative amount of net income retained in the company after dividends are paid out.

• Additional Paid-In Capital: The excess amount paid by investors over the par value of the shares.

### The Balance Sheet Connection

The accounting equation forms the basis of the balance sheet, one of the key financial statements used in accounting. The balance sheet presents a snapshot of the company’s financial position at a specific point in time, showing the relationship between assets, liabilities, and equity. It can be represented as:

Balance Sheet

Assets= Liabilities + Equity

### Importance of the Accounting Equation

1. Ensures Balance: The accounting equation ensures that the balance sheet remains balanced, meaning that every financial transaction affects at least two accounts, maintaining the equation’s integrity.

1. Facilitates Double-Entry Bookkeeping: Every transaction is recorded in at least two accounts, providing a complete and accurate record of all financial activities.

1. Aids Financial Analysis: Understanding the relationship between assets, liabilities, and equity helps stakeholders assess the financial health and stability of a business.

1. Regulatory Compliance: Adhering to the accounting equation ensures compliance with accounting standards and principles, which is crucial for regulatory reporting and auditing.

### Practical Example

Consider a company that takes out a \$50,000 loan from a bank. This transaction affects the accounting equation as follows:

1. The company’s assets (cash) increase by \$50,000.

1. Simultaneously, the company’s liabilities (loan payable) increase by \$50,000.

The updated accounting equation would be:

Assets= Liabilities + Equity

\$150,000=\$50,000+\$100,000

This example illustrates how the equation maintains balance by reflecting both the increase in assets and the corresponding increase in liabilities.