Which of the following is a Basic Accounting Equation ?

The correct answer is - Assets = Capital + Liabilities

Key Points

• Basic Accounting Equation
  • The Basic Accounting Equation is Assets = Capital + Liabilities.
  • This equation forms the foundation of the double-entry bookkeeping system.
  • It ensures that the balance sheet remains balanced, meaning the total value of assets will always equal the sum of liabilities and equity.
  • This equation is critical for maintaining accurate financial records and assessing the financial position of an entity.

Additional Information

• Components of the Basic Accounting Equation
  • Assets
    • Assets are resources owned by a business that have economic value and can provide future benefits.
    • Examples include cash, inventory, property, and equipment.
  • Liabilities
    • Liabilities are obligations that the business needs to pay in the future, often in the form of debts or loans.
    • Examples include accounts payable, mortgages, and loans.
  • Capital (Equity)
    • Capital, or equity, represents the owner's claim on the assets of the business after all liabilities have been deducted.
    • It includes investments made by the owners and retained earnings.
• Importance of the Accounting Equation
  • Ensures the accuracy of financial statements.
  • Helps in detecting errors in bookkeeping.
  • Provides a clear picture of the company's financial health.