Why It All Starts with the Balance Sheet
The Balance Sheet shows two sides of the same coin: on one side what the business owns (assets), on the other where the money came from to buy them (liabilities + capital).
| Balance Sheet | |
|---|---|
| Capital & Liabilities | Assets |
| Capital · 80,00,000 Loan from Sunil · 20,00,000 | Cash at Bank · 20,00,000 Stock of shoes · 30,00,000 Furniture · 10,00,000 Shop premises · 40,00,000 |
| Total · 1,00,00,000 | Total · 1,00,00,000 |
The Accounting Equation
Assets = Liabilities + Capital
The two sides of a balance sheet are always equal — every rupee on the assets side came from somewhere, and that "somewhere" is either an external lender (a liability) or the owner (capital).
Sometimes you'll see it rearranged:
Capital = Assets − Liabilities— how much the owner is actually worthLiabilities = Assets − Capital— how much the business owes
How Every Transaction Keeps It Balanced
Here's the magic: every business transaction changes at least two items, and the equation always stays in balance.
Starting position: Kapil opens a shoe business. He invests ₹80 lakh of his own funds, borrows ₹20 lakh from Sunil at 7%, buys a shop for ₹40 lakh, spends ₹10 lakh on furnishings, buys ₹30 lakh of stock and deposits the balance ₹20 lakh in the bank.
| Assets (₹ lakh) | = | Liab. | + | Capital | ||||
|---|---|---|---|---|---|---|---|---|
| Cash 20 | Stock 30 | Furniture 10 | Shop 40 | Total 100 | = | 20 | + | 80 |
Worked Examples
Example 1: Credit sale
Kapil sells shoes worth ₹5 lakh to retailer Ram on credit.
- Stock decreases by 5 (now 25)
- Debtors increase by 5 (new asset)
- Total assets unchanged — equation still balances at 100
Example 2: Owner takes a loan from a friend
Kapil borrows ₹2 lakh from a friend for the business.
- Cash increases by 2 (now 22)
- Liabilities increase by 2 (loan from friend)
- Both sides go up by ₹2 lakh — equation still balances
Example 3: Cash purchase of an asset
Kapil buys a computer for ₹50,000 cash.
- Cash decreases by 0.5 lakh
- Computer (asset) increases by 0.5 lakh
- Total assets unchanged — just shifted between two asset accounts
Example 4: Earning revenue (the tricky one)
Kapil sells goods worth ₹2 lakh of stock for ₹3 lakh cash. There's a ₹1 lakh profit.
- Cash up by 3 lakh
- Stock down by 2 lakh
- Net asset change: +1 lakh
- The matching ₹1 lakh increase happens on the right side as Capital (the owner is now worth ₹1 lakh more because of the profit)
iAccounting verifies the accounting equation in real time. If a transaction ever breaks the balance, the software flags it — so you catch posting errors the moment they happen, not at year-end.
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