What is Accounting Equation?

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What is Accounting Equation Accounting Equation It is a mathematical expression of relationship between Assets, Liabilities and Capital of a Business As per this Equation Assets of a Business are equal to sum total of Liabilties and Capital Assets = Liabilities + Capital Note Earlier we studied that Liabilities means External as well as internal Liabilities But in Accounting Equation Assets = Liabilities + Capital Liabilities here means External Liabilities Internal Liability is called Capital (or Equity) Steps Lets study these step one by one Step 1 Identify whether it is Asset/Liability Step 2 Identify Increase or Decrease Step 3 Record Effect on Relevant side of Equation Different Formulas for Accounting Equation Formula 1 Assets = Liabilities + Capital Formula 2 Liabilities = Assets - Capital How Derived Assets = Liabilities + Capital Assets - Capital = Liabilities Formula 3 Capital = Assets - Liabilities How Derived Assets = Liabilities + Capital Assets - Liabilities = Capital Formula 4 Assets = Equities (total Claims) How Derived Assets = Liability + Capital Equity means Capital Equities means Liability + Capital Assets = Equities