LECTURE # 01

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SANIA H. KHOSO

Accounting Equation
The basis of all the accounting methods and procedures is the accounting equation
that lays the foundation, over which all the accounting procedures are carried out.

ASSETS

LIABILITIES+OWNERS
EQUITY

By equation, we mean that both the sides are always equal to each other or are

in balance with respect to each other

Left side of the accounting equation, indicated by Assets above, is also known as

Debit side of the equation.

Right side, on the other hand is called the credit side of the equation.
This Debit Credit side should be memorized at this stage, as it is going to remain
as it is in the later advanced statements, whose structures are based on the
same pattern i.e.

L.H.S
=
DEBIT SIDE
R.H.S
=
CREDIT SIDE
It should also be noted that the position of an item in the accounting equation
exactly shows how that particular item is going to behave when transactions

occur in an ordinary business life.

Lets examine each side separately for better understanding:

L.H.S = DEBIT SIDE

As one can see that left side of the accounting equation is labeled as Asset
It means that all the Assets accounts, when assets are acquired, will be

shown on this side i.e. Debit side by a Debit entry

And all those assets, which we lose or sell off will be recorded in the opposite
way i.e. by a Credit Entry

SANIA H. KHOSO

LECTURE # 01

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Note=> It is done so as to follow the double entry method of

Accounting, which will be defined in the end of this topic.
For example:
A business purchases furniture for their new office for PKR 10,000 on cash
from Habitt. Furniture on 1st of May. The Journal entry to record this
transaction will be
01-

Furniture

PKR

05

10,000
Cash

PKR10,00
0

Purchased furniture from Habitt. Furniture on

cash for office

It can be seen that Furniture and Cash both are our assets, and increasing
one (furniture) causes its value to be shown in the left side column through

which it increased, i.e. debit column.

And our other asset, Cash as it decreases when we made the purchase, is

shown in the right hand column, which is typical for the credit side.
Thus the rule of left for debit, and right for credit is uniform throughout the
accounting procedures.

R.H.S = CREDIT SIDE

The right hand side of the accounting equation is labeled as Liabilities and

Owners Equity.
It means that all the Liabilities and Owners Equity accounts, when increased

will be shown on this side i.e. Credit side by a Credit entry

And all those Liabilities and Owners Equity, which when decreased will be
recorded in the opposite way i.e. by a Debit Entry
Note=> Again it is also done to follow the same double entry method
of Accounting.

SANIA H. KHOSO

For example:
Business purchases furniture for their new office for PKR 10,000 on PKR 5,000
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LECTURE # 01

cash and the remaining Rs. 5,000 are to be paid in ten days from Habitt.
Furniture on 1st of May. The Journal entry to record this transaction will be
01-

Furniture

PKR

05

10,000
Cash
Account Payable

PKR 5,000
5,000

Purchased furniture from Habitt. Furniture on

5000 cash and 5000 account payable in ten
days.

Now you can see that Furniture and Cash both being asset are behaving in

the same way as discussed before .

The new account Account Payable is our liability which is increased as a

result of this transaction.

And as expected, the increment in this case has caused it to show a credit

balance of Rs. 5000.

Now this R.H.S account will show a Debit side entry, when this liability will be
paid out after 10 days, i.e. it will be decreased by 5,000.
10-

Account Payable

5,000

05
Cash
Paid 5000 to Habitt. Furniture for the liability

5,000

incurred on 1st May.

DOUBLE ENTRY METHOD:

Like the universal 3rd law of motion, accounting has a method of its own that helps
in the logical treatment of accounts. It is because of this method that our accounts
always remain in balance with each other, as expected by the accounting equation.

SANIA H. KHOSO

LECTURE # 01

and opposite in direction.

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Every business transaction causes two effects which are always equal

That is it should be remembered that:

Any business transaction will cause some account to go in debit state

And will cause some other account to go in credit state
And whatever the numbers of accounts affected be, the overall magnitude of

both credit and debit entry will be same.

Now recheck all the above entries, you will see that both credit and debit
amounts are always same.