[Solved] The basic accounting equation is based on (2024)

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[Solved] The basic accounting equation is based on? ›

The accounting equation is based on the premise that the sum of a company's assets is equal to its total liabilities and shareholders' equity. As a core concept in modern accounting, this provides the basis for keeping a company's books balanced across a given accounting cycle.

The accounting equation is a formula that shows the sum of a company's liabilities and shareholders' equity are equal to its total assets (Assets = Liabilities + Equity).

Basic accounting equation states that total of Assets side should be equal to total of Liabilities and Capital. Assets = Liabilities + Capital. It is based on Dual aspect concept because every entry made in dr. side of the balance sheet has a corresponding entry in credit side of the balance sheet.

Dual aspect concept is the basic concept of accounting, According to which every business transactions has a dual effect. As the name implies , the entry made for each transaction is composed of two parts- one for the debit and the other for the credit. Every debit has an equal amount of credit.

Assets = Liabilities + Owner's Equity

The basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a business.

The accounting equation can be restated as: Assets - Equity = Liabilities.

In every accounting transaction, there are two or more accounts that are affected, in which there is always a debit and a credit, and the accounting equation is always balance. The accounting equation is assets = liabilities plus equity.

You can calculate it by deducting all liabilities from the total value of an asset: (Equity = Assets – Liabilities).

(i) Since accounting equation is always equal it ensures the accuracy in recording of business transaction. (ii) It helps in preparation of Balance Sheet.]

How to learn accounting step by step? ›

Also known as the balance sheet equation, the accounting equation formula is Assets = Liabilities + Equity.

The value of a company's total liabilities is equivalent to the sum of the difference between total assets and equity. Therefore, even though the accounting equation proposes that assets = liabilities + equity, it's also possible to reconfigure the formula to liabilities = assets – equity.