CBSE Class 11 Accountancy Rules for Accounting Equations
In this article, we will explain the Rules of Accounting Equations of CBSE Class 11 Accountancy. As Takshila Learning is offering CBSE Class 11 Commerce Classes for the preparation of exams via HD-quality video lectures with detailed explanations of the content by experienced faculty. Our best Faculties also write articles on important topics for your help.
An Accounting Equation represents the relationship between assets and liabilities of the firm, showing total assets of the firm is equal to the total liabilities and owner’s capital/equity. An Accounting equation is based on the dual aspect concept of accounting. Every transaction has two aspects-debt and credit and affects either both the sides of the equation or one side of the equation only with equal amounts.
Transactions from the accounting equation viewpoint can be divided into two, i.e.,
A. Transactions affecting two items
i. Increase in the asset, increase in the liability
ii. Decrease in the liability, decrease in the asset.
iii. Increase in the asset, increase in the owner’s equity
iv. Decrease in the owner’s capital, decrease in the asset.
Transactions affecting the same side but in opposite direction are:
i. Increase in asset, decrease in another asset
ii. Decrease in liability, increase in another liability
B. Transactions affecting more than two items.
Some transactions affect more than two items of the accounting equation or a balance sheet.
The procedure to work out an accounting equation is:
i. Analyze the transaction in terms of such variables as assets, liabilities, capital, revenues, and expenses.
ii. Decide the effect of the transactionin terms of increase or decrease on variables as assets, liabilities, capital, revenues, and expenses.
iii. Record the effect on the relevant side of the equation.
Rules for Accounting Equations
1. Capital: When capital is increased, it is credited and when a part of the capital is withdrawn, i.e., drawings are made, it is debited.
Interest on capital is an expense for the business, therefore, added to profit and thus, the capital. Since it is a loss/expense for the owner it is deducted from capital.
Assets and Liabilities will not be affected by interest on capital and interest on drawings.
2. Revenue: Owner’s Equity/Capital is increased by the amount of revenue.
3. Expenses: Owner’s Equity/Capital is decreased by the amount of expenses.
4. Owners’ Equity: when liabilities are increased, outsiders’ liabilities equities are credited and when liabilities are decreased, outsiders’ liabilities are debited.
5. If there is an increase in assets, the increase is debited in the asset account. If there is a decrease in assets, the decrease is credited to the asset account.
6. It is possible if one asset increases, the other asset decreases. Example- purchase of machinery. Thus, machinery increases and cash decreases.
7. It is possible that one asset decreases, other asset increases. Example- Sale of machinery. Thus, cash increases and machinery(asset) decreases.
8. It is possible that one liability increases, other liability decrease, e.g., on dishonor on bills payable, the Bills Payable account is debited and the Creditors’ account is credited. Thus, creditors increase and the amount of bills payable decreases.
9. If one liability decreases and the other liability increases.
10. Assets increase, liability also increases. Example- purchase of machinery on credit
11. When an asset decreases, liability decreases. Example- cash paid to creditors.
12. Effect of outstanding expenses (e.g., Outstanding Salary): increase in liabilities and decrease in capital
13. Accrued Income: Increase in asset and increase in capital
14. Income received in advance: Increase in asset (as cash) and an increase in liabilities.
15. An increase in an asset, without a corresponding increase in liability or a corresponding decrease in another asset, means an increase in capital. Conversely, an increase in liability without a corresponding increase in an asset, or a corresponding decrease in another liability, indicates a decrease in capital.
Conclusion, the Dual Aspect Concept will always hold good. This is because of the rule that every receiver is a giver and every giver is a Receiver.
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