The Accounting Equation
✏️ In one line
Assets = Liabilities + Capital. What a business owns always equals what it owes to outsiders plus what the owner has put in.
📖 Story time
- Meera starts her shop with ₹50,000 of her own money. That is her capital.
- She also takes a ₹20,000 loan from the bank. That is a liability (money owed to an outsider).
- Now the shop has ₹70,000 in assets (cash, shelves, stock).
- ₹70,000 = ₹20,000 + ₹50,000. The two sides always balance.
🎯 Your turn
Kabir's startup has assets of ₹1,50,000 and a bank loan of ₹40,000. Set his capital so the equation balances.
Nice! ₹1,50,000 = ₹40,000 + ₹1,10,000. Capital is assets minus liabilities.
Not quite. Hint: Capital = Assets − Liabilities.
Meera buys a new shelf for ₹5,000 in cash. What happens to the equation?
Nice! Correct. Shelf (asset) +₹5,000, cash (asset) −₹5,000. Total assets don't change.
Not quite. Hint: Both the shelf and the cash are things she owns.
When a business takes a loan, both its assets and its liabilities go up.
Nice! True. Cash comes in (asset up) and the business now owes the lender (liability up).
Not quite. Hint: The money arrives, but it has to be paid back.
Meera: Meera puts ₹10,000 more of her own savings into the shop.
What changes?
Nice! Yes! The shop gets more cash (asset), and the owner's share (capital) grows.
Not quite. Hint: Is it the owner's money or an outsider's?