5 CHAPTER

Accounting Equation

MEANING OF ACCOUNTING EQUATION

An accounting equation is a statement of equality between the resources and the sources which finance the resources and is expressed as follows:

 

Resources = Sources of Finances

Resources mean the Assets. The Assets refer to the tangible objects (e.g., Land and Building, Plant and Machinery, Furniture, Investments, Stock, Debtors, Bank Balance, Cash Balance) or intangible rights (e.g., Patents, Trademark, Copyright) owned by an enterprise and carrying probable future benefits.

Sources of finance mean equities and includes Internal Sources (or Internal Equity) (i.e., capital) and External Sources (or External Equity) (i.e., liabilities). Capital refers to the amount invested in ...

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