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Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations?
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Prove that ''Accounting equation holds good under all circumstances ''...
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Prove that ''Accounting equation holds good under all circumstances ''...
Proof of the Accounting Equation
The accounting equation is a fundamental principle of accounting which states that the assets of a business are always equal to the sum of its liabilities and owners' equity. This equation holds true under all circumstances and is the backbone of double-entry bookkeeping. Here are two illustrations to prove the accounting equation:
Illustration 1: Purchase of Inventory
Let's say that a company purchases inventory worth $10,000 on credit. This transaction can be broken down into the following journal entries:
- Debit Inventory Account: $10,000
- Credit Accounts Payable Account: $10,000
After this transaction, the accounting equation can be written as:
- Assets = Liabilities + Owners' Equity
- $10,000 (Inventory) = $10,000 (Accounts Payable) + $0 (Owners' Equity)
As we can see, the accounting equation holds true after this transaction. The assets of the company have increased by $10,000, and this increase is offset by an increase in liabilities. The owners' equity remains unchanged as this transaction did not involve any investment or distribution of profits.
Illustration 2: Payment of Accounts Payable
Continuing with the previous example, let's say that the company now pays off its accounts payable balance of $10,000. This transaction can be broken down into the following journal entries:
- Debit Accounts Payable Account: $10,000
- Credit Cash Account: $10,000
After this transaction, the accounting equation can be written as:
- Assets = Liabilities + Owners' Equity
- $10,000 (Inventory) + $10,000 (Cash) = $0 (Accounts Payable) + $0 (Owners' Equity)
As we can see, the accounting equation holds true after this transaction as well. The assets of the company have decreased by $10,000 due to the payment, and this decrease is offset by a decrease in liabilities. The owners' equity remains unchanged as this transaction did not involve any investment or distribution of profits.
Conclusion
These two illustrations prove that the accounting equation holds true under all circumstances. Whenever a transaction takes place, the accounting equation must balance, or else there is an error in the recording of the transaction. The accounting equation provides a clear and concise way to understand the financial position of a business and is the foundation of all accounting practices.
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Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations?
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Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations?.
Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Prove that ''Accounting equation holds good under all circumstances ''.Give atleast two illustrations?.
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