Meaning of Accounting Equation
An accounting equation is a mathematical equation which shows
that the assets and liabilities (outside liability and capital) of a firm
are equal.
' Assets = Liabilities + Capital
(1) Assets
l
Cash, Bank, Stock, Furniture, Debtors, Shares,
Prepaid Expenses, Accrued Income, Building,
Machinery, Computer, Investment, etc.
Add Less
sse sse
(2) Liabilities
J
Creditors, Outstanding Expenses, Bank Loan,
Unearned Income (Advance Income), etc.
Add Less
bil bil
. I
(3) Capital
l
.ll
Increases '
Decreases
•
- Introduction of Capital '
- Draw ings
- Profit/Income/Revenue - Loss/Expense
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Sales, Commission Rec.,
Rent Rec., Dividend Rec.,
'
Cartage, Rent Paid, Wages Paid,
Commission Paid, Depreciation,
Discount Rec., Interest Rec. Discount Allowed, Interest Paid
,I
Capital
Introduction of •
Capital
,-----....... raw1n
Add Less
·,
CLEAR
V · Capital {Capital + Revenue - Expenses}
L - Liability
V - Expenses & Losses
A - Assets
V - Revenue/Income/Profit
Format of Account ing Equat ion
Accounting Equation
S. No. Transaction Assets = Lialoilities + Caoital
Process of Accounting Equation
Step - 1 Analyse the transaction to ascertain to which variable
of accounting equation it affects by using CLEAR.
Step - 2 Decide the effect of transaction on components of
accounting equation i.e.,
whether they will increase or decrease asset, liability
and capital.
Step - 3 Finally, record the effect on accounting equation in
monetary terms.
uction •
raw1n
apital
Add Less
Question - 1.
Show the accounting equation on the basis of the following transactions
and prepare a balance sheet on the basis of last equation:
1. John started business with cash Rs. 40,000.
2. Purchase goods on Credit Rs. 15,000.
3. Purchased furniture for cash Rs. 10,000.
4. Paid rent Rs. 300 and salary Rs. 700.
5. Sold goods costing Rs. 12,000 on credit Rs. 15,000.
6. Paid to creditors Rs. 8,500.
7. Received Interest Rs. 1,500.
8. Withdrew cash for private use Rs. 4,000
9. Bought goods from Ram for Rs. 8,000 and paid Rs. 5,000 immediately.
1. John started business with cash Rs. 40,000.
✓
Cash
'Capital
E
l
Assets
l
Capital
l
lncrease
l
lncrease
2. Purchase goods on Credit Rs. 15,000.
✓
Stock
'Creditor
E
J J
Liability
Assets
J
'
lncrease lncrease
3. Purchased furniture for cash Rs. 10,000.
✓ \
Cash Furniture
E
1
Assets
l
Assets
l
Decrease
1
lncrease
4. Paid rent Rs. 300 and salary Rs. 700.
✓
Cash
'Expense
i
Assets
i
Capital
'
Decrease
i
Decrease
5. Sold goods costing Rs. 12,000 on credit Rs. 15,000.
✓
Stock
' '
Profit/ Debtor
J Loss
Assets J Assets
Capital
J J
Decrease
(12,000) i
l'ncrease
lncrease
(15,000)
(15,000 - 12,000 = 3,000)
6. Paid to creditors Rs. 8,500.
EA
Cash '
Creditors
' Assets '
Liability
'
Decrease
.
i
Decrease
7. Received Interest Rs. 1,500.
;
Cash
'Revenue
J
Assets
l
Capital
J
lncrease '
lncrease
8. Withdrew cash for private use Rs. 4,000
✓
Cash
'
Drawings
i
Assets
'
Capital
'
Decrease
i
Decrease
9. Bought goods from Ram for Rs. 8,000 and paid Rs. 5,000 immediately.
✓
Stock
l
Creditors
'Cash
J
Assets
J
Liability
l
Assets
l
lncrease l l
Decrease
(8,000) lncrease (5,000)
(8,000 - 5,000 = 3,000)
Solution
Accounting Equation of Mohan
s. Transactions
Assets = Liabilities + Caoital
No Cash+ Stock+ Furniture+ Debtors= Creditors + r~n1tat
1. Started Business
with Cash
Purcha1e goods on
40,000 + 0 + 0 +0 -- 0 + 40,000
2. credit 0 + 15.000 - 15.000 ♦ 0
New Equation 40,000 + 1S,000+ 0 ♦ 0 - 15,000 + 40,000
3. Purchase furniture • 10,000 + 0 + 10.000 ♦
♦
0
0
-- 0 ♦ 0
+ 40,000
New Equation 30,000 + 15,000+ 10,000 15,000
4. Paid rent and salary • l.000 + 0 + 0 ♦ 0 -- 0 · 1,000
New Equation 29,000 + 15,000+ 10,000 ♦ 0 - 15,000 + 39,000
5. Sold goods on credit 0 • 12,000 + 0 + 15,000 - 0 + 3,000
New Equation 29,000 + 3,000 + 10,000 + 15,000 - 15,000 + 42,000
6. Paid to Creditors - 8.500 + 0 + 0 + 0 = . 8.500 + 0
New Equation 20,500 + 3,000 + 10,000 + 15,000 = 6,500 + 42,000
7. Interest received ♦ 1,500+ 0 + 0 + 0 - 0 ♦ 1,500
New Equation 22,000 + 3,000 + 10,000 + 15,000 - 6.500 + 43,500
a Withdrew cash ror 0 - - 4,000
private u~ • 4,000 + 0 + 0 + 0
New Equation 18,000 + 3,000 + 10,000 + 15,000 - 6,500 + 39,500
9. Bought goods from
Ram and pa,d cash • 5,000 + 8,000 + 0 + 0 - 3,000 + 0
Pinal Equation 13,000 + 11,000 + 10,000 + 15,000 -- 9500 + 39,500
Balance Sheet
A Balance Sheet is a statement prepared with a view to measure the exact
financial position of a business on a certain fixed date.
Balance Sheet
as at 31st March, --"
Liabilities Amount Assets Amount
Balance Sheet
as at 31st March, ·-·
Liabilities Amount Assets Amount
Creditors 9,500 Cash 13,000
Capital 39,500 Stock 11,000
Furniture 10,000
Debtors 15,000
49,000 49,000
