Startups and Small Businesses
• Entrepreneurs use the equation to monitor cash flow and ensure that investments align with liabilities.
Corporate Analysis
• Business analysts evaluate financial statements using the equation to assess risk and profitability.
Banking and Credit Decisions
• Lenders use the equation to determine a borrower’s creditworthiness.
Case Study: Accounting Equation in Action
Consider a start-up, TechSolutions Pvt. Ltd., whose following transactions take place in its first month of operations:
Transaction Effect
Owner invests ₹1,00,000. Assets=₹1,00,000,Liabilities=₹0,Equity=₹1,00,000Assets = ₹1,00,000, Liabilities = ₹0, Equity = ₹1,00,000Assets=₹1,00,000,Liabilities=₹0,Equity=₹1,00,000
Buys office furniture (₹50,000) Assets:Cash↓₹50,000,Furniture↑₹50,000;nochangeinequity.Assets: Cash ↓ ₹50,000, Furniture ↑ ₹50,000; no change in equity.Assets:Cash↓₹50,000,Furniture↑₹50,000;nochangeinequity.
Secures loan (₹2,00,000) Assets:Cash↑₹2,00,000;Liabilities↑₹2,00,000.Assets: Cash ↑ ₹2,00,000; Liabilities ↑ ₹2,00,000.Assets:Cash↑₹2,00,000;Liabilities↑₹2,00,000.
Earns ₹1,20,000 revenue Assets↑₹1,20,000;Equity↑₹1,20,000(retainedearnings).Assets ↑ ₹1,20,000; Equity ↑ ₹1,20,000 (retained earnings).Assets↑₹1,20,000;Equity↑₹1,20,000(retainedearnings).

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