Hello everyone, welcome to another lecture.
Today we are going to learn a lot of things with you.
And see what topic is flashing on your computer screen.
Accounting Equations
As far as the basics of accounts is concerned, this is one
of the really, really, really important topics.
It will open all the pages of your balance sheet and keep
it.
Accounting Equation is the topic that will make the basis
of your balance sheet.
Which is the last step of our accounting.
Preparation of Financial Statement
Even in that, after making the trading P&L, we make the
balance sheet at the end.
So that balance sheet is a detailed view of our accounting
equation.
Which you will understand slowly, one by one by one.
Let's go, let's have a start.
Let's start the discussion.
We are Pure Professional Private Limited.
And we are starting the discussion with you about
Accounting Equation.
Let's go.
Everybody, let's have a go.
What is the meaning of Pure Professional?
Absolutely Pure, Pure Study, Pure Concept, Pure Knowledge.
It will be useful to you all your life.
Absolutely in a professional way.
We have prepared notes for you.
There are colorful notes.
We take you to the concept pad and deliver.
We tell you something from A to Z.
Not only theoretical, but practical as well, my dear
friends.
So let's start this topic as well.
Accounting Equation.
Level of Chapter.
Easy, Medium or Hard?
Shall I tell you?
There is no category in this chapter.
Super, Duper, Duper, Duper, Easy.
Absolutely easy.
We just have to discuss.
Those who have never studied before will not understand.
And those who have studied, I know it very well.
The basics of accounts are not clear to everyone.
Yes, there is one specialty of a subject like accounts.
Once the basics are clear,
Accounts become very easy.
There are no amendments like income tax or GST.
Read it once.
Things are clear forever.
But then you just have to learn accounting of different
things.
Once the debit and credit are clear, that's it.
Let's take one thing from it.
The accounting equation is the basic element of the balance
sheet.
The accounting equation is the basic element of the balance
sheet.
So, it is the basis of the balance sheet.
In simple words,
The accounting equation is the basis of the balance sheet.
The same accounting equation we put in the balance sheet in
a T-shape.
So, it becomes our balance sheet.
Sir, you are praising this accounting equation so much
That it makes the basis of the balance sheet.
So, if you teach it as an equation,
Why don't you let it be like this?
Why do we present it as a balance sheet?
There is a way of presentation.
The accounting equation, which I will tell you in a while,
What, why, how it happens,
It is a formal method.
It is a casual method.
It is not a formal method.
If you present it in the form of a balance sheet,
That equation looks better.
That's why.
It helps the company to prepare a balance sheet.
It helps the company to make a balance sheet.
And see,
Entire enterprise's asset is equal to its liabilities and
stockholder's equity.
This is the most important line.
It helps the company to prepare a balance sheet.
And see,
If the entire enterprise's asset is equal to its
liabilities and stockholder's equity.
This equation helps us to check,
Are the assets equal to the liabilities of the
stockholder's equity?
We don't know this.
We don't know the name of the stockholder's equity.
And you are saying,
Let's go to the pad.
Pad for what?
Pad is for this.
Pad is for this, friends.
Let's have a go.
Let's go to the pad.
Oho, oho, oho, oho, oho, oho, oho.
Pad is feeling bad.
It is not visible.
It is hidden.
You are hidden.
Where? I am here.
Pad is here, friends.
Friends, This is a person.
Sir, what is his name?
His name is Mr. DJ.
How did you like the name?
Sir, it is a very good dance.
This is the dance.
It is a very good name.
This is the name, sir.
Yes, good.
Mr. DJ has to do a business.
Of what?
If his name is DJ, then he will do the same business.
He has to do DJ business at a big level.
He has to buy a lot of boxes and mics.
He has to make a team.
And he wants my DJ to play everywhere in the country.
My DJ should play.
My DJ should play at weddings.
In my name.
In the name of my DJ.
Bride and groom.
And all the guests should dance.
He saw this dream.
Okay.
Now what does he need for this?
What does he need?
Sir, he needs cash for this.
If you say cash, you need money.
Money.
Yes, very, very good.
What will he do?
He will invest in business.
He will invest capital.
And how does capital invest?
Do you know?
If you don't know, then I will tell you.
Mr. DJ will go to the bank in the name of his business.
Will open a current account.
Mr. DJ will go to the bank in the name of business.
Will open a current account.
Not in your name.
In the name of your business.
For example, its name is Best DJ Services.
So he will open a current account in the name of Best DJ
Services in the bank.
DJ will not open it in his own name.
Okay, sir.
Okay.
And then DJ in the current account of that business.
Either he will deposit cash from his side.
Or from his personal savings account.
Will transfer money to that current account.
In the name of capital.
Will transfer money.
In the name of capital.
My dear friends.
For example, he invested 10 lakhs of capital.
He invested 10 lakhs.
Now what happens with this 10 lakhs?
Friends, tell me.
What happens with this 10 lakhs?
With this 10 lakhs, my dear friends.
He will buy a building.
Will buy furniture.
Will buy machinery boxes.
And he will create assets.
He will create assets from this.
My dear friends.
For example.
He bought a building.
He will have to make an office.
Put furniture in it.
And bought machinery boxes.
4 lakhs.
2 lakhs.
And 2 lakhs.
4, 2, 6, 2, 8.
And the remaining 2 lakhs.
Is still in the bank account.
In the business bank account.
This happened, my dear friends.
Something like this.
This happened, something like this.
So are you able to see?
If we see till now.
What happens?
The balance of capital remains equal.
Whose? Assets.
The balance of capital remains equal.
Whose? Assets.
My dear friends.
Yes.
How much he has invested.
Just think, my dear friends.
Just think.
How much this person has invested.
Capital.
He can buy this asset for that much only.
So if he has invested capital of 10 lakhs.
So with that.
He can generate assets of 10 lakhs.
Now he has generated assets of 8 lakhs.
So the remaining 2 lakhs bank balance.
That is also an asset.
The money kept in the bank.
That is also an asset.
So as much capital there will be.
As much assets there will be.
As much capital there will be.
As much assets there will be.
My dear friends.
I had to open an office.
I had to make a setup for recording etc.
And I had 4 lakhs in my pocket.
So what can I do with 4 lakhs?
I can bring a camera.
I can bring a projector.
I can bring lights.
For the silencer.
I mean.
Whatever tricks are there here.
I should not say tricks.
Whatever instruments are there here.
I can buy all those things.
So I have invested 3 lakhs.
1 lakh.
I still have it in the bank.
In my current business account.
That is also my asset.
That is also my property.
Because.
Whenever I want.
I can buy a new asset.
A new laptop.
A new mic.
A new writing pad.
Whenever I want.
Yes sir.
So as much capital there is.
As much assets there are.
As much capital is invested.
From there.
You can buy the same amount of assets.
Now what line did I say?
Look at it very carefully.
What line did I say?
As much capital you invest.
You can buy the same amount of assets.
As much money you have in your pocket.
You can buy the same amount of assets.
If you say.
Is there any other way in your eyes?
I told you one line.
For assets.
You will have to invest capital.
From your pocket.
Capital means.
The owner who invests money in his pocket business.
So the owner will have to invest money from his house.
Only then assets can be generated.
I am still saying this to you.
There is another way too.
Take a loan and do business.
No one has ten lakh rupees.
To start a business.
But he has seen a lot of dreams.
Day and night he wants this.
That somehow my dream.
My business should open.
Every wedding procession in the country.
Dance on my DJ.
He has seen a dream.
He does not have money.
So what to do?
He can do it by taking a loan from the bank.
He can do business by taking a loan from the bank.
Yes.
It will be a little expensive.
Things will be a little risky.
But if you want to do it, you can do it.
Who will stop him?
If you want to do it, you can do it.
Without taking it from anyone from the bank.
You can take it from a friend.
You can take it from a relative.
Yes.
So my dear friends.
To generate assets.
Assume if out of ten lakhs.
DJ only had seven lakhs.
And.
He has to buy assets of ten lakhs.
I will also erase the bank from here.
He has to buy something else for two lakhs.
Laptops etc.
So he has to generate assets of ten lakhs.
Then his DJ's business will be generated.
He has to buy a building of four lakhs.
Two lakhs of furniture.
Two lakhs of machinery.
And two lakhs of laptops.
Four, six, eight, ten.
He has seven lakhs in his pocket.
But if he buys only building, furniture, and machinery for
seven lakhs.
If he does not buy a laptop.
Then how will the song play?
By putting the data cable.
If he just buys a building.
So where will the furniture, machinery, and laptops come
from?
In total, the requirement of all things.
The requirement of all things.
So he needs 3 lakhs and from where can he arrange the
remaining 3 lakhs?
He can do it by taking a loan.
He can do it by taking a loan, which we call liabilities in
accounts, friends.
Which we call liabilities in accounts.
Liabilities.
Okay, sir.
So friends, look at this.
From where does money come to generate assets in business?
By putting it in your pocket or by taking a loan.
Whatever money comes, assets are generated in the business.
Assets are generated.
And if he wants to buy a laptop worth 1 lakh, so that some
money should be saved in the bank balance.
It's not that all the money will be spent.
Some bank balance should be there for daily expenses.
So he can do this too.
It's his wish.
First he will see how much will be the interest, 10 lakhs.
Then he will say that I have 7 lakhs in my pocket and I am
going to take a loan of 3 lakhs.
Then out of 10 lakhs, he can buy a building, a furniture, a
laptop, save some money in the bank.
It's his wish.
Okay, sir.
So friends, always, always, always, this equation remains
the same.
Capital plus liabilities is equal to assets.
If capital and liabilities money is used to generate assets
in the business.
Then it will be seen in assets in the name of building,
furniture, machinery, laptop.
If capital and liabilities money is kept in the business
and not used.
Then also it will be seen in the bank account of the
business.
Then also it will be seen in the current account of the
bank of the business.
Oh, yes, sir.
So that is also an asset.
So this equation will always remain the same.
Capital and liabilities money, even if it is used to buy
assets or not.
Even if it is kept in the bank, then also this equation
will always remain the same.
Capital plus liabilities is equal to assets.
But sir, sir, you check in your notes.
Maybe you are forgetting a little, sir.
Sir, it's not written in the notes.
Capital plus liabilities is equal to assets.
If the entire enterprise's asset is equal to liability plus
stockholder's equity.
Sir, the capital word is not written here.
Here it is written as stockholder's equity.
So friends, what is the problem?
They are saying that assets is equal to liabilities plus
capital.
They are giving another name to capital.
They are giving a better name.
Stockholder's equity.
Now what is the problem in this?
If they want to give such a name, then it is their wish.
Do you have any problem?
Nothing, sir.
Capital's other name is stockholder's equity.
In capital, these reserves are also added.
So this becomes stockholder's equity, my dear friends.
There is such a small difference.
Capital plus reserves is equal to stockholder's equity.
Now capital is also the owner's money and reserve is also
the owner's money.
Reserve means the money that is saved from the profits in
the business for the coming years.
So that is also the money invested by the owner in the
business.
The owner has the right on the profits.
The owner said that I am not taking it home.
Let it be invested in the business.
That is called a reserve.
Then it becomes a reserve.
Okay, sir.
So whether it is capital or reserve, both are the owner's
money.
So to generate assets, the owner invested money from
capital.
In the beginning, he brought it from home.
Or after a year or two, the profits of the business were
very good.
The owner said that we will buy another machine from these
profits next time.
Let them stay in the business.
We are not taking them home.
So this is also the investment done by the owner in the
business.
This is also capital in a way.
But its other name is reserve.
And capital plus reserve, both are called stockholder's
equity.
And then stockholder's equity plus liability is equal to
asset.
This is my accounting equation.
This is the accounting equation.
And friends, friends, companions.
What is the most important thing about this equation?
You do one transaction.
Do 1000 transactions.
Do 1 lakh transactions.
Do 10 lakh transactions.
This equation will always, always, always be tallied.
This equation will never be mismatched.
It will always be tallied.
It will never be mismatched.
Never, ever, ever.
This is the special thing about the father of accounts,
Luca di Passioli.
He has made such rules.
He has presented such rules of accounts.
He has shown such principles, such equations, which are
infallible.
You know the father of accounts, Luca di Passioli.
Italian mathematician.
If you don't know, then do your homework today.
Search on YouTube.
Who is Luca di Passioli?
Search about him.
There is a very good 27-minute video on YouTube about him.
It is made very well.
The account that you are reading, which is the basis of
your daily bread.
Learn a little about its genesis.
You will also get general knowledge.
If you talk to two people, you will also get an aura.
Whether the boy is knowledgeable or the girl is
knowledgeable.
Anyway, look at it as an interest.
Anyway, it is fun in history.
The person who made so many techniques and gave it to you.
Which is still going on.
Who has no substitute till date.
The person who has no substitute till date.
The person made you like this and gave you the technique.
So you should know about it.
You should see, you should hear, you should understand.
This is the specialty.
Let's go a little further.
Let's come to the notes.
This is the meaning of the accounting equation.
Which we are covering this chapter in front of you.
It is the base of double entry accounting system.
This is also the base of the double entry accounting system.
Sir, how.
How would you please elaborate.
What do you call the double entry system of accounting?
What does the double entry system of accounting mean?
That two aspects of any transaction.
There will be a double effect of any transaction.
The meaning of any transaction having a double effect is
that...
This means that whatever transaction we will do in this
equation, some effect will come here and some effect will
come here.
Either both effects can be here or both effects can be here.
But there will be two effects.
Either one effect left side and one effect right side.
Either both effects right side or both effects left side.
But we will read two effects.
Sir, give us some example.
Give us some examples.
Okay, friends.
The owner has deposited 7 lakh rupees in the current
account of the business.
What will be the effect of this? What will be the effect of
this?
Sir, there will be 7 lakh rupees in the capital.
Left hand side.
Absolutely right.
There will be 7 lakh rupees in the capital.
Left hand side.
One effect will come here.
And second, 7 lakh rupees will come in the bank balance of
the business.
The second effect will come here.
I said very very good.
Now the second example.
We bought a building from the bank balance of 7 lakhs.
We bought a building.
So what will happen?
The bank balance will decrease here.
And a new asset called building will be born here.
Both effects will come here.
But there are two effects.
You see.
There were two effects of this transaction.
There are two effects of this transaction too.
One more transaction.
Buying goods on loan.
So what will happen with this? My dear friends, with this,
your liability will increase.
Okay, sir.
Liability will increase because we are buying on loan.
Loan means liability.
Our liability will increase by the name of creditors.
Absolutely right.
We call the goods we buy on loan as creditors.
Okay, sir.
And my dear friends, on the other hand, your capital will
decrease.
The second effect will come on capital.
Why? Because this is an expense.
What does the expense do?
The expense lowers your profits, which has an effect on the
capital.
The expense lowers your profits, which has an effect on the
capital.
So if the profit falls down, then the capital will also
fall down.
So on one hand, your liability will increase.
And with the same amount, your capital will have an effect.
There will be a downward effect.
But there will be two effects.
There will be two effects of any transaction.
This means that this equation follows our double entry
system.
It also makes the basis of it.
Double entry accounting system is a system that ensures
that accounting and transaction equation should be equal as
it affects both sides.
Okay.
Double entry means that whatever transaction happens, this
equation will always be our tail.
Any change in the asset account, there should be a change
in related liability and stockholder equity account.
That's what they are saying.
If it affects one side, then it should affect the other
side as well.
Both effects on one side or both effects on the other side.
Asset is equal to liability plus stockholder equity is
written again.
We have written the same accounting equation in the form of
a little picturization.
What does assets mean?
Now I had written to you that liability plus stockholder
equity is equal to assets.
Let's write this and go.
Assets is equal to liability plus stockholder equity.
So sir, how do we understand?
How do you understand?
Which paper do you have to give? How do you understand?
Assets is equal to liability plus stockholder equity.
What does assets mean?
Economic resources owned by a business.
Economic resources means such things that will earn you
money in the future.
So assets, building, machinery, furniture, goods, we get to
earn money from all this.
They all earn us money.
That's why these are all assets.
Liability means financial obligations or debts of a
business.
Debt of a business.
Stockholders equity, owners claim on the assets of a
business.
Money invested by the owner in the business.
Stockholders equity.
It can be in the form of capital plus in the form of
reserves.
It can be in two ways.
We will make you do some questions on this.
The meaning of the basic accounting equation was something
like this.
Okay.
We will do questions on this now, my dear friends.
Let's go.
We do the practice of questions in the coming clips.
And the most important thing.
There will be two effects of any transaction.
One left side, one right side.
Both right side or both left side.
There will be two effects.
This is the crux of the accounting equation.