How does loss affect an accounting equation?

The whole of financial accounting (i.e. recording of transactions) is based on the accounting equation. The following is the accounting equation:

Capital + Liabilities = Assets

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Or, Assets – Liabilities = Capital


Accounting equation shows the sources of funds and its application.

Loss affects both the sides of the accounting equation. It reduces the capital in one side of the accounting equation and in the other side, it reduces assets, i.e., Cash.

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