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Accounting Equation

The document discusses accounting equations and their components. It defines accounting equations as relating assets to liabilities and owner's equity. It explains that every transaction affects at least two accounts to maintain the balance. Assets equal the sum of liabilities and capital. Assets include current assets like cash and fixed assets like property. Liabilities include short term like bills and long term like loans. Capital represents the owner's equity claim on assets. Several examples are given of accounting equation transactions and their effects on the financial statement elements of assets, liabilities, and capital.

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Vaibhav Gupta
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119 views2 pages

Accounting Equation

The document discusses accounting equations and their components. It defines accounting equations as relating assets to liabilities and owner's equity. It explains that every transaction affects at least two accounts to maintain the balance. Assets equal the sum of liabilities and capital. Assets include current assets like cash and fixed assets like property. Liabilities include short term like bills and long term like loans. Capital represents the owner's equity claim on assets. Several examples are given of accounting equation transactions and their effects on the financial statement elements of assets, liabilities, and capital.

Uploaded by

Vaibhav Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Accounting Equations
The relationship of assets with that of liabilities and owner’s equity in the equation form is known as
“Accounting Equation”. Under double entry system, every business transaction has two-fold effect on
the business enterprise where each transaction affects changes in assets, liabilities or capital in such a
way that an accounting equation is completed and equated.
ASSETS = LIABILITY + CAPITAL
The contribution by the owner is termed as capital; the borrowings are termed as loans or liabilities.
Whenever the loan is repayable in the short run, say within one year, it is called short-term loan or
liability. On the other hand, if the loan is repayable within 4 or 5 years or more, it would be termed as
long term loan or liability.
On the other hand, money raised has been invested in two types of assets – fixed assets and current
assets. Often the owner’s claim or fund in the business is called equity. Owner’s claim implies capital
invested plus any profit earned minus any loss sustained.

Capital Owner’s fund or Owner’s equity


Liability Short-Term: Creditors, Bills Payable, outstanding expenses, bank overdraft, etc
Long-Term: Loan
Assets Current Assets: Cash, Bills Receivables, Debtors, Stock, Bank, Prepaid expenses,
etc
Fixed Assets: Furniture, Buildings, Machinery, Land, etc.

PRACTICAL QUESTIONS

Ques.1 Make an accounting equation from following:-


1. Started business with cash 80,000
2. Purchased goods on cash 20,000
3. Purchased goods on credit (X) 15,000
4. Purchased furniture (Cash) 5,000
5. Paid rent 500
6. Paid salaries 2,000
7. Deposited in bank 20,000
8. Paid X by cheque 10,000
9. Withdrawn money for private use 2,000
10. Paid telephone bills by cheque 1,000

Ques.2 Use Accounting Equation to show the effect of following transactions on assets, liabilities and
capital and also show the final Balance Sheet:-
1. Started business with cash 70,000
2. Purchased goods on credit 18,000
3. Purchased machinery 20,000
4. Payment made to creditors in full settlement 17,500
5. Depreciation on machinery 2,000
[Assets = Rs. 68,500 and Capital = Rs. 68,500]

Ques.3 Prove that the Accounting Equation is satisfied in all following transactions of Suresh:-
1. Commenced business with cash Rs. 60,000.
2. Paid rent in advance Rs. 500

Himanshu Dalania 9268216826


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3. Purchased goods for cash Rs. 30,000 and credit Rs. 20,000.
4. Sold goods for cash Rs. 30,000, costing Rs. 20,000.
5. Paid salary Rs. 500 and salary outstanding Rs. 100.
6. Bought motor-cycle for personal use Rs. 5,000.
[Assets = Rs. 84,500; Liabilities = Rs. 20,100 and Capital = Rs. 64,400]

Ques.4 Anil had the following transactions:-


1. Commenced business with cash Rs. 50,000.
2. Purchased goods for cash Rs. 20,000 and on credit Rs. 30,000.
3. Sold goods for cash Rs. 40,000, costing Rs. 30,000.
4. Rent paid Rs. 500 and Rent outstanding Rs. 100.
5. Bought furniture Rs. 5,000 on credit.
6. Bought refrigerator for personal use Rs. 5,000.
7. Purchased building for cash Rs. 20,000.
Use Accounting Equation to show the effect of following transactions on assets, liabilities and capital
and also show the final Balance Sheet.
[Assets = Rs. 89,500; Liabilities = Rs. 35,100 and Capital = Rs. 54,400]

Himanshu Dalania 9268216826

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