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What is Accounting Equation? Video Lecture | Accountancy Class 11 - Commerce

FAQs on What is Accounting Equation? Video Lecture - Accountancy Class 11 - Commerce

1. What is the accounting equation?

Ans. The accounting equation is a fundamental principle in accounting that states that assets equal liabilities plus equity. It is expressed as: Assets = Liabilities + Equity. This equation ensures that a company’s balance sheet remains balanced and reflects its financial position accurately.

2. Why is the accounting equation important in financial statements?

Ans. The accounting equation is crucial because it forms the foundation for double-entry bookkeeping, ensuring that every financial transaction affects at least two accounts. It guarantees that the balance sheet is accurate and that the total resources of a business (assets) are funded by debts (liabilities) and owners' investments (equity).

3. How do you apply the accounting equation in practice?

Ans. To apply the accounting equation in practice, one must record every transaction in a way that maintains the balance between assets, liabilities, and equity. For example, if a company takes out a loan (increasing liabilities), it also gains cash (increasing assets), keeping the equation balanced.

4. What happens if the accounting equation does not balance?

Ans. If the accounting equation does not balance, it indicates an error in the accounting records. This could be due to incorrect entries, missing transactions, or miscalculations. It is essential to review the financial records to identify and correct discrepancies to ensure accurate financial reporting.

5. Can the accounting equation change over time?

Ans. Yes, the accounting equation can change over time as a business grows and its financial situation evolves. Changes in assets, liabilities, or equity due to new investments, loans, or profits will alter the equation. However, the fundamental relationship between these three components will always remain the same.

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Jun 13, 2025 Last updated

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