ACCOUNTING EQUATION

Assets = Liabilities + Owners Equity (capital)

Meaning of Accounting Equations:
 Accounting equation is a mathematical expression which shows that assets and liabilities of a firm are equal.
 The above relation is known as the Accounting equation or Balance sheet equation.
1,00,000 cash + 50,000 goods (stock) = 1,50,000
Bank loan - 2,00,000 - furniture 1,50,000 cash 50000

Rules of Accounting Equation:

 Every transaction has two aspects
 Increase or Decrease in liability will be adjusted from liability
 Increase or decrease in asset will be adjusted from asset
 Every expenses will be deducted from capital and every income will be added to capital.
 Equation should be matched.
 ASSETS = LIABILITY + CAPITAL
1.
Assets = Liabilities + Capital
S. No. Cash Bank Stock Creditors
Transactions ( `) + ( `) + ( `) = ( `) ( `)
(i) Started business with cash 45,000 = 45,000
45,000 = 45,000
Opened a Bank Account with a
(ii) deposit – 4,500 + 4,500 =
40,500 + 4,500 = 45,000
(iii) Bought goods from M/s. Sun & Co. 11,200 = 11,200
40,500 + 4,500 + 11,200 = 11,200 + 45,000

2.

Assets = Liabilities + Capital

S. Cash Stock Debtors Creditors
No Transactions ( `) + ( `) + ( `) ( `) ( `)
(i) Gopinath Started business with 25,000 = 25,000
25,000 = 25,000
(ii) Purchased goods from Shyam 10,000 10,000
25,000 + 10,000 = 10,000 + 25,000
(iii) Sold goods to Sohan – 1,800 + 1,500 = – 300
25,000 + 8,200 + 1,500 = 10,000 + 24,700
(iv) Gopinath withdrew from business –5,000 = – 5,000
20,000 + 8,200 + 1,500 = 10,000 + 19,700

3.

S. Transactions Assets = Liabilities + Capital

 Cash Advances Expenses Outstanding Expenses
No. ( `) + ( `) = ( `) ( `)
(i) Started business with Cash 50,000 = 50,000
50,000 = 50,000
– 2,000
(ii) Salaries paid – 2,000 = (expenses)
48,000 = 48,000
– 200
(iii) Wages Outstanding = 200 + (expenses)
4,800 = 200 47,800
– 100
(iv) Interest due but not paid = 100 + (expenses)
48,000 = 300 + 47,700
(v) Rent paid in advance – 150 + 150 =
47,850 + 150 = 300 + 47,700

Assets = 47,850 + 150

= ` 48,000
Liabilities = ` 300
Capital = ` 47,700

6.

Assets = Liabilities + Capital

Cash Furniture Stock
S. No. Transaction ( `) + ( `) + ( `) = ( `)
(i) Ajit started business ` 20,000 20,000 = 20,000
20,000 = 20,000
(ii) He purchased furniture for ` 2,000 – 2,000 + 2,000 =
18,000 + 2,000 = 20,000
– 200
(iii) He paid Rent of ` 200 – 200 = (expense)
17,800 + 2,000 = 19,800
(iv) He purchased goods on credit ` 3,000 3,000 = 3,000
17,800 + 2,000 + 3,000 = 3,000 + 19,800
He sold goods (cost price ` (2,000) for ` 5,000 3,000
(v) on cash 5,000 + + –2,000 = (Profit)
22,800 + 2,000 + 1,000 = 3,000 + 22,800
5.

Assets = Liabilities + Capital

S. Cash Stock Furniture Creditors
No. Transaction ( `) + ( `) + ( `) = ( `) ( `)
Mohan commenced business
(i) with cash 50,000 = 50,000
 50,000 = 50,000
–
(ii) Purchased goods for cash 30,000 + 30,000 =
20,000 + 30,000 = 50,000
(iii) Purchased goods on credit 20,000 = 20,000
20,000 + 50,000 = 20,000 + 50,000
Sold goods costing ` 10,000 2,000
(iv) for ` 12,000 12,000 + – 10,000 = (profit)
32,000 + 40,000 = 20,000 + 52,000
(v) Bought furniture on credit 2,000 = 2,000
32,000 + 40,000 + 2,000 = 22,000 + 52,000
–
(vi) Paid cash to a creditor 15,000 = – 15,000
17,000 + 40,000 + 2,000 = 7,000 + 52,000
(vii) Salary Paid – 1,000 = – 1,000 (expenses)
16,000 + 40,000 + 2,000 = 7,000 + 51,000

6.
Assets = Liabilities + Capital
Cash Stock Machinery
S. No. Transaction ( `) + ( `) + ( `) ( `) ( `)
(i) Started business with Cash ` 70,000 70,000 70,000
70,000 70,000
(ii) Credit purchase of goods ` 18,000 18,000 = 18,000
70,000 + 18,000 = 18,000 + 70,000
500
(iii) Payment made to creditor ` 17,500 in full settlement – 17,500 = – 18,000 + (Discount Received)
52,500 + 18,000 = 70,500
(iv) Purchase of Machinery for Cash ` 20,000 – 20,000 20,000
32,500 + 18,000 + 20,000 = 70,500
– 2,000
(v) Depreciation on Machinery ` 2,000 – 2,000 (Depreciation)
32,500 + 18,000 + 18,000 = 68,500

9.
S. Assets = Liabilities + Capital
No Cash Stock O/s Expenses
. Transactions ( `) + ( `) ( `) ( `)
Started business with 1,20,00
(a) cash 0 + = + 1,20,000
1,20,00
0 + = + 1,20,000
Purchased goods for +10,00
(b) cash -10,000 0 =
1,10,00
0 + 10,000 = + 1,20,000
(c) Rent Received +5,000 +5,00
 0
1,15,00
0 + 10,000 = + 1,25,000
(d) Salary outstanding +2,000 -2,000
1,15,00
0 + 10,000 = 2,000 + 1,23,000
Sold goods for cash
(costing `5,000) ` 7,0
(e) 00 +7,000 -5,000 +2,000
1,22,00
0 + 5,000 = 2,000 + 1,25,000
Goods destroyed by
(f) fire -500 = -500
1,22,00
0 + 4,500 = 2,000 1,24,500

10.
Assets = Liabilities + Capital
Cash Prepaid Rent Stock Creditors Salary outstanding
S. No. Transactions ( `) + ( `) + ( `) ( `) + ( `) ( `)
(i) Commenced business with cash ` 60,000 60,000 60,000
60,000 = 60,000
(ii) Paid Rent in Advance ` 500 – 500 + 500
59,500 + 500 = 60,000
(iii) Purchased goods for Cash ` 30,000 and Credit ` 20,000 – 30,000 + 50,000 20,000
29,500 + 500 + 50,000 = 20,000 + 60, 000
10,000
(iv) Sold goods for Cash ` 30,000 Costing ` 20,000 30,000 + + – 20,000 (Profit)
59,500 + 500 + 30,000 = 20,000 + 70,000
(v) Paid Salary ` 500 and Salary Outstanding being ` 100 – 500 = – 500
100 – 100
59,000 + 500 + 30,000 = 20,000 + 100 + 69,400
– 5000
(vi) Brought motorcycle for personal use ` 5,000 – 5000 = (Drawings)
54,000 + 500 + 30,000 = 20,000 + 100 + 64,400

Balance Sheet
Amount Amount
Liabilities ( `) Assets ( `)
Capital 64,400 Cash 54,000
Creditors 20,000 Prepaid Rent 500
Salary Outstanding 100 Stock 30,000
85,500 85,500

11.
Assets = Liabilities + Capital
 (i) Started business with Cash ` 60,000 60,000 = 60,000
60,000 = 60,000
2,000
(ii) Rent Received ` 2,000 2,000 = (Income)
62,000 = 62,000
500
(iii) Accrued Interest ` 500 500 = (Income)
62,000 + 500 = 62,500
(iv) Commission received in advance ` 1,000 1,000 = 1,000
63,000 + 500 = 1,000 + 62,500
(v) Amount withdrawn ` 5,000 – 5,000 = – 5,000
58,000 + 500 = 1,000 + 57,500

12.
Assets = Liabilities + Capital
Cash Bank Stock Furniture Motor Cycle Creditors Outstanding Rent
S. No. Transaction ( `) + ( `) + ( `) + ( `) + ( `) = ( `) + ( `) ( `)
Commenced business with
(i) cash ` 50,000 50,000 50,000
50,000 = 50,000
(ii) Paid in to bank ` 10,000 – 10,000 + 10,000
40,000 + 10,000 = 50,000
Purchased goods for
Cash ` 20,000 and
(iii) Credit ` 30,000 –20,000 + 20,000
30,000 30,000
20,000 + 10,000 + 50,000 = 30,000 + 50,000
Sold goods for Cash ` 40,000 – 10,000
(iv) Costing ` 30,000 40,000 30,000 = (Expense)
60,000 + 10,000 + 20,000 = 30,000 + 60,000
– 500
(v) Rent paid ` 500 – 500 = (Expense)
59,500 + 10,000 + 20,000 = 30,000 + 59,500
– 100
(vi) Rent Outstanding ` 100 100 + (Expense)
59,500 + 10,000 + 20,000 = 30,000 + 100 + 59,400
Bought furniture ` 5,000 on
(vii) credit 5,000 = 5,000
59,500 + 10,000 + 20,000 + 5,000 = 35,000 + 100 + 59,400
Bought refrigerator for – 5,000
(viii) personal use ` 5,000 – 5,000 = (Drawings)
54,500 + 10,000 + 20,000 + 5,000 = 35,000 + 100 + 54,400
Purchased motorcycle for
(ix) cash – 20,000 + 20,000
34,500 + 10,000 + 20,000 + 5,000 + 20,000 = 35,000 + 100 + 54,400

Balance Sheet
 Amount Amount
Liabilities ( `) Assets ( `)
Capital 54,400 Cash 34,500
Creditors 35,000 Bank 10,000
Rent Outstanding 100 Stock 20,000
Furniture 5,000
Motor Cycle 20,000
89,500 89,500

15.
Assets = Liabilities + Capital
Bills
S.n Cash Bank Stock Machinery Furniture Debtors Receivable
o Transactions ( `) + ( `) + ( `) + ( `) + ( `) + ( `) + ( `) ( `)
Started Business with
Cash of ` 50,000 and 1,00,00
(i) Bank of ` 1,00,000 50,000 + 0 1,50,000
Stock ` 60,000 60,000 60,000
Machinery ` 1,00,000 1,00,000 1,00,000
Furniture ` 50,000 50,000 50,000
1,00,00
50,000 + 0 + 60,000 + 1,00,000 + 50,000 = 3,60,000
rd
1/3 of above goods sold
at a profit of 10% on cost,
that is, 60,000 × 1/3 =
20,000 × 110% = 22,000
and half of this is received (20,000 2,000
(ii) in Cash 11,000 ) 11,000 (Profit)
1,00,00
61,000 + 0 + 40,000 + 1,00,000 + 50,000 + 11,000 = 3,62,000
Depreciate Machinery by (10,000)
(iii) 10% (1,00,000 × 10%) (10,000) Expenses
1,00,00
61,000 + 0 + 40,000 + 90,000 + 50,000 + 11,000 = 3,52,000
Cash withdrawn for
(iv) personal use (10,000) (10,000)
1,00,00
51,000 + 0 + 40,000 + 90,000 + 50,000 + 11,000 = 3,42,000
Interest on Drawings
charged @ 5% (10,000 ×
(v) 5%) (500)
500
1,00,00
51,000 + 0 + 40,000 + 90,000 + 50,000 + 11,000 = 3,42,000
Goods Sold to
Gupta for ` 10,000 and
received a Bill Receivable (10,000
(vi) for the same amount. ) 10,000
 1,00,00
51,000 + 0 + 30,000 + 90,000 + 50,000 + 11,000 + 10,000 = 3,42,000
Received ` 10,000 from
Gupta against the Bill
Receivable on its
(vii) maturity. 10,000 (10,000)
1,00,00
61,000 + 0 + 30,000 + 90,000 + 50,000 + 11,000 + NIL = NIL + 3,42,000

16.
Assets Liabilities + Capital
Building Debtors
and ( `) Security
Cash Bank Furniture Stock Creditors Deposits
Transactions ( `) + ( `) + ( `) + ( `) + = ( `) + ( `) ( `)
Sunil started business with
(i) Cash `1,50,000. 1,50,000 1,50,000
1,50,000 = 1,50,000
Opened Bank Account by
(ii) depositing `25,000 from cash – 25,000 25,000
1,25,000 + 25,000 1,50,000
Sold personal car for ` 50,000 and
(iii) deposited money in Bank A/c 50,000 50,000
1,25,000 + 75,000 2,00,000
Building and Furniture purchased –
(ii) for `1,00,000 1,00,000 1,00,000
25,000 + 75,000 + 1,00,000 2,00,000
(iii) Purchased goods from Ram on credit 50,000 = 50,000
25,000 + 75,000 + 1,00,000 + 50,000 = 50,000 + 2,00,000
– 500
(iv) Paid Cartage `500 – 500 (Expenses)
24,500 + 75,000 + 1,00,000 + 50,000 = 50,000 + 1,99,500
Sold to Shyam on credit goods 3,000
(v) costing ` 6,000 for ` 9,000 –6,000 9,000 (Profits)
24,500 + 75,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 2,02,500
1,000
(vi) Received rent from tenants of ` 1,000 1,000 (Incomes)
25,500 + 75,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 2,03,500
Received Security Deposits from
(vii) tenants of ` 1,500 1,500 1,500
27,000 + 75,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 1,500 + 2,03,500
–100
(viii) Purchased Stationery for Cash of ` 100 – 100 (Expense)
26,900 + 75,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 1,500 + 2,03,400
 – 50,000
(ix) Invested in Shares (personal) ` 50,000 - 50,000 (Drawings)
26,900 + 25,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 1,500 + 1,53,400
200
(x) Received Interest of ` 200 in Cash 200 (Income)
27,100 + 25,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 1,500 + 1,53,600
(xi) Introduced fresh Capital of ` 25,000 25,000 25,000
52,100 + 25,000 + 1,00,000 + 44,000 + 9,000 = 50,000 + 1,500 + 1,78,600
– 500
(xii) Goods of ` 500 were destroyed by fire – 500 (Loss)
52,100 + 25,000 + 1,00,000 + 43,500 + 9,000 = 50,000 + 1,500 + 1,78,100