Accounting equation
Assets = equity + liability
Example:
On 31 December, a business has:
• Assets: 50,000
• Liabilities: 20,000
• Equity: 30,000
This balances because:
50,000 = 20,000 + 30,000
Assets
The present economic resources controlled by the entity as a result of past events
Economic resource is a right that has the potential to produce present or future
economic benefits.
Eg – vehicles, machinery, equipments, furniture, cash , shares.
Liability
A present obligation of the business/ entity to transfer an economic resource as a result of past
events
Something that we owe as a business to another entity like a supplier or a bank.
An obligation is a duty or responsibility that the entity has no practical ability to avoid
Eg – bank loans, trade payables, other payables.
Equity
Owners contribution to the business is known as equity/ capital
An owner can contribute to the business by cash or other assets
Eg- owners profit, owners drawings, business profit, ordinary shares, retained earnings.
Questions,
Details related to Andrews business for the month of July.
1. He started the business by investing 500000 in cash and 200000 worth of furniture.
2. He obtained a bank loan worth of 250000 cash
3. Purchases of 80000 on credit was done by the business.
4. Cash purchases worth of 40000 was done by the business
5. Paid to trade payables 30000
6. Andrew has taken 10000 from the business to pay for his own medical bills = drawings.
7. Operational expenses paid 3000
8. Intrest income received as cash ///5000
9. Rent expense paid for July 7000
10. Paid back to transaction no . 03 – 40000, discount received 6000 is included here.
Transaction Assets = Equity + Liability
1 +700 +700
2 +250 +250
3 +80 +80
4 +40
-40
5 -30 -30
6 -10 -10
7 -3 -3
8 +5 +5
9 -7 -7
10 -34 +6 -40
Totals 951000 691000 260000
Income statement / P&L statement of the business.
An income statement (sometimes called a profit and loss account) is a financial
document that shows a business’s income and expenses over a period of time.
It is used to calculate whether the business made a profit (if income is greater
than expenses) or a loss (if expenses are greater than income).
Sales (revenue)
-Sales return
0000
Cost of sales
Opening inventory
Carriage inwards
-Carraige outwards
-closing inventory (*****)
Gross profit 0000
Other income ****
0000
Expenses
S&D expense
Financial expense
Administrative
expense
Operational expenses (****)
Net profit/loss 0000
Details are related to Aamirs business for the month of July 2025.
Balances as at 1st July 2025
• Furniture 300,000
• Cash 150000
• Trade receivable 200,000
• Inventory 150000
• Bank loan 250,000
• Trade payable 50000
Transactions for the month of July.
1. The owner invested additional capital of 100,000
2. Bank loan installment paid 30,000 including interest 5000 – 25000 liability
3. Purchase worth of 150000 on credit
4. 105000 worth goods sold for 230,000
5. Expense paid 31,000
6. Rent income received 11,000
7. Sales 180000. Cost of sale is 85,000.
8. Paid to trade payable 45,000 discount received 5000.
Transaction Assets Equity Liability
Furniture Cash Trade Inventory Bank loan Trade
receivable payables
Opening 300000 150000 200000 150000 500000 250000 50000
balances
1 100 100,000
2 -30 -5,000 -25
3 +150 +150
4 +230 -105 +125,000
5 -31 -31000
6 +11 +11000
7 +180 -85 +95000
8 -45 +5000 -50
Totals 300,000 565,000 200,000 110,000 800,000 225 150,000
1175,000 1175,000
Prepare the income statement.
Sales (revenue)
-Cost of sales
Gross profit
Other income
Expenses
Net profit/ loss
Page no.161
Jasraj business
Income statement for the year ended 31/12/2016
Sales revenue 150,000
less Sales return (6000)
Net revenue 144,000
Cost of sales
add Opening inventory 12,000
add Carriage inwards 500
Less Purchase returns (6000)
add Purchases 45,000
less Closing inventory (8000) (43500)
Gross profit 100,500
add Other income
less Expenses
Administration 10,000
Electricity 7000
Fuel 5000
Insurance 6000
Rent 30000
Wages 25000 (83,000)
Profit for the year 17,500
Statement of financial position.
The Statement of Financial Position (often called a Balance Sheet) is a financial
statement that shows what a business owns, what it owes, and how much the
owners have invested, at a specific point in time.
It shows the financial position of a business on one day, usually the last day of the
accounting period.
Classifications of Assets
Non-current assets
The asset which will be used by the business for more than one year. Period.
Current assets
The assets, which will be used within one year period
Classifications of liabilities
Non-current liabilities
The liability that the business needs to settle after more than one year.
Current liabilities
The liability that the business has to settle within one year period
Details Cost Accumulated Carrying value
depreciation
Non current assets
Vehicle 180,000 (10,000) 170,000
0000
Current assets
Trade rec
cash
0000
Total assets *********
Equity
Net profit
Ordinary shares
00000
Non current liability
0000
Current liability
0000
Total liability & equity ********
Details related to ABC business (year end is June 31st 2025)
Assets and liabilities as at July 1st 2024
- Motor vehicles 500000 (accumulated depreciation = 20,000)
- Office equipment 600,000 (accumulated depreciation = 30,000)
- Inventory 100000
- Trade receivables 120000
- Cash 80000
- Trade payables 275000 -
- Revenue 150,000
- Purchases 200,000
Transactions
1. Expenses paid 5000
2. Revenue returns of 12,000
3. 5000 worth goods bought on credit is damaged and returned to supplier (-5000)
4. Goods worth 20,000 sold at 50,000 on credit – sofp (50,000 ADDED)
5. 40,000 cash paid for creditor with 5000 discount included – sofp (add discount to other
income in the income st.) PAID 35,000
6. Rent expenses paid 10,000
7. Office expenses paid 20,000
8. Goods worth 1000 stolen
9. Admin expenses paid 12,000
10. Intrest income received 15,000
11. Carriage inwards 2000
12. Carriage outwards 1500
13. Discount allowed 500
14. Closing inventory 15,000
Prepare the income statements and the statement of financial position
Page no.165
