Purchase of Goods | Accounting Equation | Balance Sheet | Journal Entry | Book Keeping




Liability + Capital = Assets

  • Liability comprises all the term loans, secured/unsecured loans, funds, debentures, creditors, outstanding expenditures, and so on.
  • Capital comprises Paid-up Capital, Reserves and Surplus, and other profits (this is quite debatable). Meaning of capital varies with

    proprietorship business and ltd companies. We are combining capital and profits or loss just to understand the accounting equation.
  • Assets are all those capital expenditures that were made from capital and liability. That is the reason the equation has to be equal every time. 
Let us understand the transaction of the purchase of goods in cash.

             Purchase A/c Dr       $ 1000
                 To cash  A/c          $ 1000
          (Purchase on cash for $ 1000)

Due to this transaction, there is no difference in the total amount of assets, there is only change in the amount of the class of current assets. 
Cash balance is decreased and stock is increased by $ 1000 each. Hence you can say that asset is the only element affected by the transaction but in totality, there is not any change as such in the assets side of the balance sheet.

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