Definition An Accounting Equation is a mathematical expression which shows that the assets & Liabilities of a firm are equal Assets = Liabilities Capital Rules for Accounting Equations 1.Capital When Capital is increased, it iscredited ( )and when a part of the capital is withdrawn, it isdebited(-). 2.Interest on capitalis an expense for the business so it isdebited(-)to thecapital but on other side it is an income for the owner, it iscredited( ). 1.Interest on Drawingsis a profit for the business therefore added to the Capital. 2.Assets and Liabilitieswill not be affected by interest on capital and interest on drawings. 3.Prepaid Expenses: It is an asset so added to the asset side & subtracted from Cash. 4.Outstanding Expenses: It is liability so added to liability & debited to Capital. 5.Income received in advance :It is a liability so added to liability & added to Cash account.