Illustration 1.

Rakesh started business as on 1st April, 2021 with a capital of ` 1,50,000. During the year, the
following transactions took place:
Particulars `
1. Furniture purchased for cash. 20,000
2. Purchased goods from Mahesh on credit. 25,000
3. Sold goods (costing ` 10,000) to Mohan for cash. 14,000
4. Additional capital introduced. 20,000
5. Commission received in advance. 2,000
6. Paid to creditor (Mahesh) in full settlement. 22,500
7. Sold goods (costing ` 15,000) for ` 18,000 out of which ` 5,000 received in cash.
8. Depreciation on furniture charged @ 10%.
Prepare Accounting Equation to show effect of the above transactions.
Solution:
No. Transactions Assets = Liabilities + Capital
Cash + Furniture + Stock + Debtors = Creditors + Commn. + Capital
Recd. in
Advance
` ` ` ` ` ` `
Commenced business 1,50,000 + 0 + 0 + 0 = 0 + 0 + 1,50,000
with cash
1. Furniture purchased
for cash –20,000 + 20,000 + 0 + 0 = 0 + 0 + 0
New Equation 1,30,000 + 20,000 + 0 + 0 = 0 + 0 + 1,50,000
2. Purchased goods
from Mahesh 0 + 0 + 25,000 + 0 = 25,000 + 0 + 0
New Equation 1,30,000 + 20,000 + 25,000 + 0 = 25,000 + 0 + 1,50,000
3. Cash Sales
Profit ` 4,000 (i.e.,
` 14,000 – ` 10,000) 14,000 + 0 – 10,000 + 0 = 0 + 0 + 4,000
New Equation 1,44,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,54,000
4. Additional capital
introduced 20,000 + 0 + 0 + 0 = 0 + 0 + 20,000
New Equation 1,64,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,74,000
5. Commission received
in advance 2,000 + 0 + 0 + 0 = 0 + 2,000 + 0
New Equation 1,66,000 + 20,000 + 15,000 + 0 = 25,000 + 2,000 + 1,74,000
6. Paid to creditor
Mahesh ` 22,500
in full settlement –22,500 + 0 + 0 + 0 = –25,000 + 0 + 2,500
New Equation 1,43,500 + 20,000 + 15,000 + 0 = 0 + 2,000 + 1,76,500
7. Sold goods (costing
` 15,000) for
` 18,000 out of
which ` 5,000
received in cash 5,000 + 0 – 15,000 + 13,000 = 0 + 0 + 3,000
New Equation 1,48,500 + 20,000 + 0 + 13,000 = 0 + 2,000 + 1,79,500
8. Depreciation on
furniture @ 10% on
` 20,000 0 – 2,000 + 0 + 0 = 0 + 0 – 2,000
New Equation 1,48,500 + 18,000 + 0 + 13,000 = 0 + 2,000 + 1,77,500

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Illustration 2.
Show effect of the following transactions on the Accounting Equation:
Particulars `
1. Ram started business with cash 50,000
2. Purchased goods on credit 4,000
3. Purchased goods for cash 1,000
4. Purchased furniture for cash 500
5. Withdrew cash for personal use 700
6. Paid rent 200
7. Received interest 100
8. Sold goods on credit (cost ` 500) 700
9. Paid to creditors 400
10. Paid salaries 200

Solution:
  No. Transactions Assets = Capital + Liabilities
Cash + Stock + Furniture + Debtors = Capital + Creditors
` ` ` ` ` `
1. Ram started business
with cash ` 50,000 50,000 + 0 + 0 + 0 = 50,000 + 0
2. Purchased goods on
credit for ` 4,000 0 + 4,000 + 0 + 0 = 0 + 4,000
New Equation 50,000 + 4,000 + 0 + 0 = 50,000 + 4,000
3. Purchased goods for
cash ` 1,000 –1,000 + 1,000 + 0 + 0 = 0 + 0
New Equation 49,000 + 5,000 + 0 + 0 = 50,000 + 4,000
4. Purchased furniture
for cash for ` 500 –500 + 0 + 500 + 0 = 0 + 0
New Equation 48,500 + 5,000 + 500 + 0 = 50,000 + 4,000
5. Withdrew cash for
personal use ` 700 –700 + 0 + 0 + 0 = –700 + 0
New Equation 47,800 + 5,000 + 500 + 0 = 49,300 + 4,000
6. Paid rent ` 200 –200 + 0 + 0 + 0 = –200 + 0
(Note 1)
New Equation 47,600 + 5,000 + 500 + 0 = 49,100 + 4,000
7. Received interest
` 100 (Note 2) 100 + 0 + 0 + 0 = 100 + 0
New Equation 47,700 + 5,000 + 500 + 0 = 49,200 + 4,000
8. Sold goods costing
` 500 for ` 700
on credit (Note 3) 0 – 500 + 0 + 700 = 200 + 0
New Equation 47,700 + 4,500 + 500 + 700 = 49,400 + 4,000
9. Paid to creditors
` 400 –400 + 0 + 0 + 0 = 0 – 400
New Equation 47,300 + 4,500 + 500 + 700 = 49,400 + 3,600
10. Paid salaries ` 200 –200 + 0 + 0 + 0 = –200 + 0
(Note 4)
New Equation 47,100 + 4,500 + 500 + 700 = 49,200 + 3,600

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Notes:
1. Rent paid will reduce cash by ` 200. Rent being an expense will reduce profit by ` 200. Thus, capital will be
reduced by ` 200.
2. Interest received will increase cash. It being an income will increase profit by ` 100. Thus, capital will be
increased.
3. Stock will be reduced by ` 500 and Debtors will be increased by ` 700. Capital will be increased by ` 200
(i.e., ` 700 – ` 500) being profit.
4. As explained in Note 1.

Illustration 3.
Give an example for each of the following types of transactions:
1. Increase in one asset, decrease in another asset.
2. Increase in asset, increase in liability.
3. Increase in asset, increase in owner’s capital.
4. Decrease in asset, decrease in liability.
5. Decrease in asset, decrease in owner’s capital.
6. Decrease in liabilities, increase in owner’s capital.
7. Increase in one liability, decrease in another liability.
8. Increase in liabilities, decrease in owner’s capital.

Solution:
1. Purchase of furniture for cash—Increase in furniture and decrease in cash.
2. Purchase of furniture on credit—Increase in furniture and increase in liability.
3. Capital introduced by proprietor—Increase in cash and increase in capital.
4. Payment to creditors—Decrease in cash and decrease in creditors.
5. Cash withdrawn by proprietor—Decrease in cash and decrease in capital.
6. Conversion of partner’s loan into capital—Increase in capital and decrease in loan.
7. Bills payable accepted—Increase in bills payable and decrease in creditors.
8. Outstanding expenses provided—Increase in creditors for outstanding expenses and
decrease in capital.
Illustration 4.
Prepare Accounting Equation from the following transactions and show the Balance Sheet:
Particulars `
1. Manu started business with cash. 5,00,000
2. Purchased a building from Sohan by raising a Loan of ` 9,00,000 from SBI. 10,00,000
3. Paid interest on loan ` 20,000 and instalment of ` 2,00,000.
4. Purchased goods from Sohan on credit. 1,00,000
5. Goods returned to Sohan costing. 20,000
6. Sold goods costing ` 40,000 for ` 50,000 on credit to Ram.
7. Withdrew goods from business for personal use. 10,000
8. Accrued interest. 5,000
9. Commission received in advance. 20,000
10. Cash received from Ram. 10,000

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Solution: BALANCE SHEET OF MANU as at ...
Liabilities ` Assets `
Creditors 80,000 Cash in Hand 2,10,000
Commission Received in Advance 20,000 Stock 30,000
Loan from SBI 7,00,000 Debtors 40,000
Capital 4,85,000 Accrued Interest 5,000
Building 10,00,000
12,85,000 12,85,000

(Complete Solution on next page no. 5)

Illustration 6.
From the following information, calculate total assets of the business:
Capital ` 4,00,000; Creditors ` 3,00,000; Revenue earned during the period ` 7,50,000; Expenses
incurred during the period ` 2,00,000 and value of unsold Stock ` 2,00,000.
Solution: Total Assets = Liabilities + Capital + Profit
Total Assets = Creditors + Capital + Profit
= ` 3,00,000 + ` 4,00,000 + ` 5,50,000 (i.e., ` 7,50,000 – ` 2,00,000)
= ` 12,50,000 (including ` 2,00,000 Closing Stock).
Illustration 7.
A commenced his cloth business on 1st April, 2021 with capital of ` 30,000. On 31st March,
2022, his assets were ` 50,000 and liabilities were ` 10,000. Find out his closing capital and
profits earned during the year.
Solution: Total Assets = Capital + Liabilities
` 50,000 = Capital + ` 10,000
Closing Capital = ` 50,000 – ` 10,000 = ` 40,000
Profit = Closing Capital – Opening Capital
= ` 40,000 – ` 30,000 = ` 10,000.
Illustration 8.
Calculate equity if:
1. Owner’s equity in the beginning is ` 60,000.
2. Equity of creditors at the end is ` 50,000.
3. Revenue during the period is ` 70,000.
4. Expenses during the same period are ` 65,000.
Also calculate amount of owner’s equity at the end.
Solution: Total Equity = Owner’s equity + Creditors’ equity
= (Opening Owner’s equity + Revenue – Expenses) + Creditors’ equity
= (` 60,000 + ` 70,000 – ` 65,000) + ` 50,000.
= ` 65,000 + ` 50,000 = ` 1,15,000.
Owner’s Equity at the end = ` 65,000.
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 No. Transactions Assets = Liabilities + Capital
Cash + Building + Stock + Debtors + Accrued = Loan + Creditors + Comm. + Capital
Interest from SBI Recd. in
Advance
` ` ` ` ` ` ` ` `
1. Started business with cash 5,00,000 + 0 + 0 + 0 + 0 = 0 + 0 + 0 + 5,00,000
2. Building Purchased by raising
a loan from SBI (` 9,00,000) –1,00,000 + 10,00,000 + 0 + 0 + 0 = 9,00,000 + 0 + 0 + 0
New Equation 4,00,000 + 10,00,000 + 0 + 0 + 0 = 9,00,000 + 0 + 0 + 5,00,000
3. Paid Interest on Loan
` 20,000 and Instalment of
` 2,00,000 –2,20,000 + 0 + 0 + 0 + 0 = –2,00,000 + 0 + 0 – 20,000
New Equation 1,80,000 + 10,00,000 + 0 + 0 + 0 = 7,00,000 + 0 + 0 + 4,80,000
4. Purchased Goods from Sohan 0 + 0 + 1,00,000 + 0 + 0 = 0 + 1,00,000 + 0 + 0
New Equation 1,80,000 + 10,00,000 + 1,00,000 + 0 + 0 = 7,00,000 + 1,00,000 + 0 + 4,80,000

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5. Goods Returned to Sohan
Costing ` 20,000 0 + 0 – 20,000 + 0 + 0 = 0 – 20,000 + 0 + 0
New Equation 1,80,000 + 10,00,000 + 80,000 + 0 + 0 = 7,00,000 + 80,000 + 0 + 4,80,000
6. Sold Goods worth ` 50,000
(Costing ` 40,000) on credit
to Ram (Profit = ` 50,000 –
` 40,000 = ` 10,000) 0 + 0 – 40,000 + 50,000 + 0 = 0 + 0 + 0 + 10,000
New Equation 1,80,000 + 10,00,000 + 40,000 + 50,000 + 0 = 7,00,000 + 80,000 + 0 + 4,90,000
7. Withdrew Goods of ` 10,000
for Personal Use 0 + 0 – 10,000 + 0 + 0 = 0 + 0 + 0 – 10,000
New Equation 1,80,000 + 10,00,000 + 30,000 + 50,000 + 0 = 7,00,000 + 80,000 + 0 + 4,80,000
8. Accrued Interest 0 + 0 + 0 + 0 + 5,000 = 0 + 0 + 0 + 5,000
New Equation 1,80,000 + 10,00,000 + 30,000 + 50,000 + 5,000 = 7,00,000 + 80,000 + 0 + 4,85,000
9. Commission Received in
Advance ` 20,000 20,000 + 0 + 0 + 0 + 0 = 0 + 0 + 20,000 + 0
New Equation 2,00,000 + 10,00,000 + 30,000 + 50,000 + 5,000 = 7,00,000 + 80,000 + 20,000 + 4,85,000
10. Cash Received from Ram 10,000 + 0 + 0 – 10,000 + 0 = 0 + 0 + 0 + 0
New Equation 2,10,000 + 10,00,000 + 30,000 + 40,000 + 5,000 = 7,00,000 + 80,000 + 20,000 + 4,85,000
Illustration 9.
X started a business on 1st April, 2021 with a capital of ` 50,000 and a loan of ` 25,000 borrowed
from Y. During the year ended 31st March, 2022, he had introduced additional capital of ` 25,000
and had withdrawn ` 15,000 for personal use. On 31st March, 2022 his assets were ` 1,50,000.
Find out his capital as on 31st March, 2022 and profit made or loss incurred during the year.
Solution: Closing Capital = Closing Assets – Closing Liabilities (i.e., Y’s Loan)
= ` 1,50,000 – ` 25,000 = ` 1,25,000
Profit = Closing Capital + Drawings – Additional Capital – Opening Capital
= ` 1,25,000 + ` 15,000 – ` 25,000 – ` 50,000 = ` 65,000.
Illustration 10.
On 31st March, 2022, the total assets and external liabilities were ` 1,00,000 and ` 3,000
respectively. During the year, the proprietor had introduced additional capital of ` 10,000 and
had withdrawn ` 6,000 for personal use. He earned a profit of ` 10,000 during the year. Calculate
the capital as on 1st April, 2021.
Solution: Closing Capital = Closing Assets – Closing External Liabilities
= ` 1,00,000 – ` 3,000 = ` 97,000
Opening Capital = Closing Capital + Drawings – Additional Capital – Profits
= ` 97,000 + ` 6,000 – ` 10,000 – ` 10,000 = ` 83,000.
Advanced Level Question
11. Use Accounting Equation to show the effect of following transactions on assets, liabilities
and capital and also show the Balance Sheet:

Transactions
(i) Mohan started business with cash of ` 3,60,000, Goods ` 1,00,000, Debtors ` 20,000,
Furniture ` 20,000 and Creditors ` 40,000.
(ii) Goods costing ` 12,000 sold to Ram at a loss of 10%, out of which ` 4,000 received
in cash.
(iii) Cash deposited into bank ` 40,000.
(iv) Outstanding Rent ` 10,000.
(v) Received cheque from Ram ` 6,400 in full settlement of ` 6,800. Cheque deposited on
the same date.
(vi) Prepaid Insurance ` 2,000.
(vii) Paid to creditors ` 36,000 by cheque in full settlement of their accounts.
(viii) Depreciation on Furniture @ 10%.
(ix) Unearned Commission ` 4,000.
Solution: BALANCE SHEET as at ...
Liabilities ` Assets `
Unearned Commission 4,000 Cash 3,26,000
Outstanding Rent 10,000 Debtors 20,000
Capital 4,50,400 Stock 88,000
Prepaid Insurance 2,000
Bank 10,400
Furniture 18,000
4,64,400 4,64,400

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 Transactions Assets = Liabilities + Capital

No. Cash + Stock + Furniture + Debtors + Prepaid + Bank = Creditors + Unearned + Outstanding + Capital
` ` ` ` Insu. (`) ` (`) Comm. (`) Rent (`) `
(i) 3,60,000 + 1,00,000 + 20,000 + 20,000 + 0 + 0 = 40,000 + 0 + 0 + 4,60,000

(ii) 4,000 – 12,000 + 0 + 6,800 + 0 + 0 = 0 + 0 + 0 – 1,200 (Loss)

New Equation 3,64,000 + 88,000 + 20,000 + 26,800 + 0 + 0 = 40,000 + 0 + 0 + 4,58,800

(iii) –40,000 + 0 + 0 + 0 + 0 + 40,000 = 0 + 0 + 0 + 0

New Equation 3,24,000 + 88,000 + 20,000 + 26,800 + 0 + 40,000 = 40,000 + 0 + 0 + 4,58,800

(iv) 0 + 0 + 0 + 0 + 0 + 0 = 0 + 0 + 10,000 – 10,000

New Equation 3,24,000 + 88,000 + 20,000 + 26,800 + 0 + 40,000 = 40,000 + 0 + 10,000 + 4,48,800

(v) 0 + 0 + 0 – 6,800 + 0 + 6,400 = 0 + 0 + 0 – 400

New Equation 3,24,000 + 88,000 + 20,000 + 20,000 + 0 + 46,400 = 40,000 + 0 + 10,000 + 4,48,400

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(vi) –2,000 + 0 + 0 + 0 + 2,000 + 0 = 0 + 0 + 0 + 0

New Equation 3,22,000 + 88,000 + 20,000 + 20,000 + 2,000 + 46,400 = 40,000 + 0 + 10,000 + 4,48,400

(vii) 0 + 0 + 0 + 0 + 0 – 36,000 = –40,000 + 0 + 0 + 4,000

New Equation 3,22,000 + 88,000 + 20,000 + 20,000 + 2,000 + 10,400 = 0 + 0 + 10,000 + 4,52,400

(viii) 0 + 0 – 2,000 + 0 + 0 + 0 = 0 + 0 + 0 – 2,000

New Equation 3,22,000 + 88,000 + 18,000 + 20,000 + 2,000 + 10,400 = 0 + 0 + 10,000 + 4,50,400

(ix) 4,000 + 0 + 0 + 0 + 0 + 0 = 0 + 4,000 + 0 + 0

New Equation 3,26,000 + 88,000 + 18,000 + 20,000 + 2,000 + 10,400 = 0 + 4,000 + 10,000 + 4,50,400
Illustration 12.
How are the following items dealt with in Accounting Equation?
(i) Interest due but not received ` 500.
(ii) Rent received in advance ` 1,000.
(iii) Insurance premium paid in advance ` 1,500.
(iv) Salaries due but not paid ` 2,000.

Solution:
(i) Accrued interest shall be added to assets on one side and to the capital on other side.
(ii) It will increase cash on the assets side and increase the liabilities.
(iii) It will decrease one asset (cash) and increase another asset (Prepaid insurance).
(iv) Salary being an expense will be deducted from the capital and being unpaid will be added
to liabilities.