Accounting Equation

Objectives

After going through this lesson, you shall be able to understand the following concepts.

• Meaning of accounting equations

• Steps to prepare an accounting equation

Meaning of Accounting Equations

It is a mathematical equation which shows equality between Resources obtained from funds and Sources of funds. Here
resources means assets (both tangible as well as intangible) such as Land, Building, Plant and Machinery, Cash, Bank,
Patents, Trademarks etc. obtained by an enterprise from its funds. On the other hand, sources of funds refer to the
sources from where an enterprise has obtained funds for buying their resources. It includes, internal funds (or internal
equities or owner’s equity) and external funds (or external equities or borrowed funds). Internal funds represent the
amount invested by the owner in the business and external funds show the amount obtained from the outsiders creating
financial obligation on an enterprise. Therefore, an accounting equation can be represented as:
Resources obtained from Funds = Sources of funds;
or
Total Assets = Internal Fund (or Internal Equities or Owner's Equity) + External Fund (or External Equities);
or
Simply as, Assets = Capital + Liabilities
External Parties (outsiders) have their claim in priority to Internal Party (owner) over the assets of an enterprise.
Therefore, internal fund balance (or capital) is a residual balance of total assets, left after paying off the external funds (or
liabilities) i.e. Capital = Assets – Liabilities.
As each business transaction has two sided effect, therefore, both the sides of an accounting equation always stands
equal. This is also based on the accounting principle of duality.

Steps to prepare an accounting equation

(1) Analyse transaction in detail and identify how assets, liabilities and capital balances are affected by it.

(2) Effect in terms of increase or decrease in the balance of assets, liabilities or capital is identified.

(3) If there is an increase then it is added to and if there is a decrease then it is subtracted from the respective asset,
liability or capital account.

(4) At last, ensure that total of Left side represented by Assets is always equal to total of Right side represented by the
sum of Liabilities and Capital.

Effect of Transaction on the Accounting Equation

As we consider all the transactions from the business point of view, so whenever we consider effects of any transaction on
the assets, liabilities or capital, then we have to keep two things in mind.

(i) Measure effect of a transaction in terms of increase or decrease in the balance of asset, liabilities or capital.

(ii) Both sides of the equation should always be equal.

Note- If after taking any effect of a transaction, both sides of the equation mismatch or becomes unequal, then surely
there is a mistake on your side in taking an effect of the transaction. In no case, both sides can get unequal because in
accounts we record all the transactions on the principle of duality. As per this principle, every transaction has a dual effect
of debit and credit with the same amount or simply, there is an increase and decrease with same amount. Therefore, both
the sides i.e. Assets (Left side) and sum of Capital and Liabilities (Right side) always stands equal.

Now let’s consider different related transactions one by one and effect of each transaction on the accounting equation.

(a) Balbir started business with cash of Rs 35,000.

In the given transaction, cash is brought by Balbir to start the business. Asset in the form of cash is increasing on the Left
hand side and as capital is introduced, therefore, capital is increasing on the Right hand side. Hence, both the sides of an
accounting equation will stand equal.

Particulars Assets = Liabilities Capital

 Cash +

(Rs) (Rs)

a. Started business with cash 35,000 = 35,000

Balance 35,000 = 35,000

(b) Purchased goods from Vishal on credit for Rs 22,000.

In the given transaction, goods are purchased from Vishal on credit. It implies, increase of asset in the form of stock on
the left hand side and as goods are purchased on credit therefore, creditors are also increasing.

Assets = Liabilities Capital

Particulars
Cash Stock (Rs)Creditors
+ + (Rs)
(Rs) (Rs) (Rs)

Old Balance 35,000 = 35,000

Current transaction +22,000 +22,000

New Balance 35,000 + 22,000 = 22,000 + 35,000

(c) Goods sold to Vinayak in cash Rs 10,000.

In the given transaction, goods are sold to Vinayak in cash. By this, asset in the form of cash is increasing on the Left hand
side and on the other hand, again asset in the form of stock is decreasing on the Left Hand side. As asset is increasing and
decreasing simultaneously on the same side, therefore both the sides of the equation stand equal.

Assets = Liabilities Capital

Particulars
Cash Stock Creditors
+ +
(Rs) (Rs) (Rs) (Rs)

Old Balance 35,000 + 22,000 = 22,000 35,000

Current transaction +10,000 + –10,000

New Balance 45,000 + 12,000 = 22,000 + 35,000

(d) Goods sold to Vinod for Rs 10,000 (costing Rs 8,000).
In the given transaction, goods are sold to Vinod on credit. By this, asset in the form of Debtors (Vinod) is increasing with
the sale price of Rs 10,000. On the other hand, asset in the form of Stock is decreasing with the cost price of Rs 8,000.
The difference between the Selling Price and the Cost Price of Rs 2,000 (10,000 − 8,000) is termed as profit and it will be
added to the Capital balance on the Right Hand side. On the Left Hand Side, there is an increase by Rs 10,000 and
decrease by Rs 8,000; thus there is an overall net increase of Rs 2,000, whereas on the Right hand side, there is an
increase of Capital with an amount of Rs 2,000 (profit). Hence, both the sides of the equation stand equal.

Assets = Liabilities Capital

Particulars
Cash Stock Debtors Creditors
+ + +
(Rs) (Rs) (Rs) (Rs) (Rs)

Old Balance 45,000 + 12,000 = 22,000 35,000

Current transaction –8,000 + +10,000 2,000

New Balance 45,000 + 4,000 + 10,000 = 22,000 + 37,000

(e) Purchased furniture for Rs 12,000.

In the given transaction, asset in the form of furniture is increased by Rs 12,000 and on the same side another asset in
the form of cash is decreased by Rs 12,000. As asset is increasing and decreasing simultaneously on the same side,
therefore both the sides of the equation stand equal.

Assets = Liabilities Capital

Particulars
Cash Stock Debtors Furniture Creditors
+ + + +
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

Old Balance 45,000 + 4,000 10,000 = 22,000 37,000

Current transaction –12,000 +12,000

New Balance 33,000 + 4,000 + 10,000 + 12,000 = 22,000 + 37,000

(f) Paid rent of Rs 3,500 and salary of Rs 4,500.

 In the given transaction, Capital is decreasing due to expenses (or losses) incurred in the form of rent and salary with
Rs 8,000 (i.e. 3,500 + 4,500). On the left hand side, asset in the form of cash is reducing due to expenses of Rs 8,000. As
there is a simultaneous decrease on the Left Hand Side and Right Hand Side with Rs 8,000, therefore both the sides of the
equation stand equal.

Assets = Liabilities Capital

Particulars
Cash Stock Debtors Furniture Creditors
+ + + +
(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

Old Balance 33,000 + 4,000 + 10,000 + 12,000 = 22,000 37,000

–3,500
Current transaction –8,000
(expense)

–4,500

(expense)

New Balance 25,000 + 4,000 + 10,000 + 12,000 = 22,000 + 29,000

(g) Salary Outstanding of Rs 5,600.

In the given transaction, Capital is decreasing due to expense (or losses) incurred in the form of salary with Rs 5,600 on
the Right Hand Side and on the same side liability is increasing in the form of Salary Outstanding with the same amount.
As there is a simultaneous increase and decrease on the same side (right hand side), therefore, both the sides of the
equation stand equal.

Assets = Liabilities Capital

Particulars Salary
Cash Stock Debtors Furniture Creditors
+ + + + Outstanding +
(Rs) (Rs) (Rs) (Rs) (Rs)
(Rs)
(Rs)

25,000 + 4,000 + 10,000 + 12,000 = 22,000 29,000

–5,600
Current
5,600
transaction
(Salary)

New Balance 25,000 + 4,000 + 10,000 + 12,000 = 22,000 5,600 + 23,400

(h) Withdrawn Cash of Rs 6,500 and goods of Rs 1,500 for personal use.
In the given transaction, on the left hand side Assets in the form of cash and stock is decreasing with Rs 6,500 and Rs
1,500 respectively. Whereas, on the right hand side Capital is decreasing due to effect of drawings made with Rs 8,000
(i.e. 6,500 + 1,500). As there is a simultaneous decrease on the Left Hand Side and Right Hand Side with Rs 8,000, so
both the sides of the equation stand equal.

Assets = Liabilities Capital

Particulars Salary
Cash Stock Debtors Furniture Creditors
Outstanding
+ + + + +
(Rs) (Rs) (Rs) (Rs) (Rs)
(Rs)
(Rs)

Old Balance 25,000 + 4,000 + 10,000 + 12,000 = 22,000 + 5,600 + 23,400

–8,000
Current
–6,500 + –1,500
transaction
(Drawings)

New Balance 18,500 + 2,500 + 10,000 + 12,000 = 22,000 5,600 + 15,400

Example 1 Adil Traders started business with cash of Rs 35,000. For his business, following transactions are to be
recorded.

(i) Purchased goods of Rs 30,000 on credit.

(ii) Paid rent of Rs 8,000.

(iii) Withdrawn Rs 5,000 for paying his son’s school fees.

(iv) Purchased chairs for office use Rs 3,000.

(v) Sold goods costing Rs 1,750 for Rs 2,250.

(vi) Interest on drawings charged @ 10%

Prepare Accounting Equation.

Solution

Assets = Liabilities + Capital

[Link].
Transactions
Cash Stock Furniture Creditors
+ + =
(Rs) (Rs) (Rs) (Rs) (Rs)

Started business with cash 35,000 = 35,000

35,000 = 35,000

(i) Purchased goods on credit + 30,000 = 30,000

35,000 + 30,000 = 30,000 + 35,000

(ii) Paid rent –8,000 = –8,000

 (rent)

27,000 + 30,000 = 30,000 + 27,000

Withdrawn cash for paying son’s

(iii) –5,000 –5,000
school fees

22,000 + 30,000 = 30,000 + 22,000

(iv) Purchase chairs for office use –3,000 + 3,000 =

19,000 + 30,000 + 3,000 = 30,000 + 22,000

Sold goods costing Rs 1,750 for 500

(v) 2,250 + –1,750 +
Rs 2,250
(profit)

21,250 + 28,250 + 3,000 = 30,000 + 22,500

–500
(vi) Interest on drawings @ 10%
(Expense for
Proprietor)

+500

(Gain for
Business)

21,250 + 28,250 + 3,000 = 30,000 + 22,500

Total Assets = Liabilities + Capital

Cash + Stock + Furniture = Creditors + Capital

21,250+28,250+3,000 = 30,000 + 22,500

52,500 = 30,000 + 22,500

Example 2 Randeep started business with cash of Rs 60,000. Following transactions occurred during the year.
(i) Purchased goods of Rs 20,000 from Vikrant in cash.

(ii) Sold goods to Kapil costing Rs 4,200 at a loss of Rs 600 in cash.

(iii) Sold goods on credit (costing Rs 3,000) at a profit of 20% on cost.

(iv) Deposited into Bank Rs 10,000.

(v) Commission Received of Rs 2,500.

(vi) Stationery purchased for Rs 350.

Prepare Accounting Equation.

Solution

Assets = Liabilities + Capital

[Link].
Transactions
Cash Stock Debtors Bank
+ + + =
(Rs) (Rs) (Rs) (Rs) (Rs)

Started business with

60,000 = 60,000
cash

60,000 = 60,000

(i) Purchased goods for cash –20,000 + 20,000 =

40,000 + 20,000 = 60,000

Sold goods to Kapil –600

(ii) costing Rs 4,200 at a loss 3,600 + –4,200 =
of Rs 600 in cash. (loss)

43,600 + 15,800 = 59,400

Sold goods on credit +600

(iii) (costing Rs 3,000) at a + –3,000 + 3,600
profit of 20% on cost. (profit)

43,600 + 12,800 + 3,600 = 60,000

Deposited Cash into the

(iv) –10,000 + 10,000 =
bank

33,600 + 12,800 + 3,600 + 10,000 = 60,000

2,500
(v) Commission Received 2,500
(income)

36,100 + 12,800 + 3,600 + 10,000 = 62,500

(vi) Stationery purchased –350 –350

(Expenses)

35,750 + 12,800 + 3,600 + 10,000 = 62,150

Total Assets = Liabilities + Capital

Cash + Stock +Debtors+ Bank = + Capital

35,750+12,800+3,600+10,000 = 0 + 62,150

62,150 = 0 + 62,150

Example 3 From the following particulars of Laxman Sharma, Prepare accounting equation.

(i) Started business with Cash Rs 50,000, Building Rs 2,50,000 and Furniture Rs 15,000.

(ii) Took a bank loan of Rs 30,000.

(iii) Purchased goods of Rs 20,000 in cash and Rs 15,000 on credit.

(iv) Goods costing Rs 3,000 sold at 20% profit on cost.

(v) Sold 30% of goods at a profit of 25%.

(vi) Sold 20% of the remaining goods at a profit of 10%.

(vii) Introduced additional capital of Rs 20,000.

(viii) Commission of Rs 3,200 received in advance.

(ix) Received securities deposit of Rs 20,000 from tenants.

(x) Paid Life Insurance Premium of Rs 11,000.

Solution

Assets = Liabilities

[Link].
Transactions Commission Secur
Bank
Cash Building Furniture Stock Creditors
Received in
+ + + = Loan + + + Depos
Advance
(Rs) (Rs) (Rs) (Rs) (Rs)
(Rs) (Rs) (Rs)

Started
business with
(i) 50,000 + 2,50,000 + 15,000 =
cash, building
and furniture
 50,000 + 2,50,000 + 15,000 =

Took a bank
(ii) loan of Rs 30,000 = 30,000
30,000.

80,000 + 2,50,000 + 15,000 = 30,000 +

Purchased
goods of Rs
20,000 in
(iii) –20,000 + + 35,000 = + 15,000
cash and Rs
15,000 in
credit.

60,000 + 2,50,000 + 15,000 + 35,000 = 30,000 + 15,000 +

Sold goods
(costing Rs
(iv) 3,000) at a 3,600 + + –3,000 =
profit of 20%
on cost.

63,600 + 2,50,000 + 15,000 32,000 = 30,000 + 15,000 +

Sold 30% of
goods at a
(v) profit of 25%. +12,000 + –9,600 = +
(9,600 ×
1.25)

75,600 + 2,50,000 + 15,000 + 22,400 = 30,000 + 15,000

Sold 20% of
the remaining
goods at a
(vi) 4,928 + –4,480 = +
profit of 10%.
(4,480 ×
1.10)

80,528 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 +

Introduced
additional
(vii) 20,000
capital of Rs
20,000.

1,00,528 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 +

(viii) Commission 3,200 + 3,200

of Rs 3,200
 received in
advance.

1,03,728 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 + 3,200

Received
securities
(ix) deposits of Rs 20,000 20,00
20,000 from
tenants.

1,23,728 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 + 3,200 + 20,00

Paid Life
Insurance
(x) –11,000
Premium of
Rs 11,000

1,12,728 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 + 3,200 + 20,00

Total Assets = Liabilities + Capital

Bank Loan + Creditors + Commission

Cash + Building + Furniture + Stock = + Capital
Received in Advance + Security Deposits

1,12,728 + 2,50,000 + 15,000 + 17,920 = 30,000 + 15,000 + 3,200 + 20,000 + 3,27,448

3,95,648 = 68,200 + 3,27,448

3,95,648 = 3,95648

Total Stock of Goods: 20,000 + 15,000 = 35,000

Sales:
Sold on Credit: 3,000
30% Sold at profit of 25%: 30% of 32,000 (35,000 – 3,000) = 9,600
20% of remaining sold at profit of 10%:20% of 22,400 (35,000 – 3,000 – 9,600) = 4,480

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Comprehensive Examples of Accounting Equation

Practical problems based on accounting equations.

Example 1 Fill in the blanks.

 Total Assets Equities

Case (Rs)
Internal External Total

(Rs) (Rs) (Rs)

a 40,000 ? 15,000 ?

b ? - - 50,000

c 60,000 36,000 ? ?

d ? ? 25,000 45,000

Solution

We know that, Assets = Capital + Liabilities.

Or Assets = Internal Equities + External Equities.

Equities
Total Assets

Case (Rs) Internal External Total

(Rs) (Rs) (Rs)

a 40,000 25,000 15,000 40,000

b 50,000 - - 50,000

c 60,000 36,000 24,000 60,000

d 45,000 20,000 25,000 45,000

Example 2 Calculate the following.

(i) Capital of business is Rs 40,000 and Outsiders liabilities are Rs 22,000. Calculate total assets of the business.

(ii) Total Assets of business are Rs 2,50,000. Calculate creditors, if net worth is Rs 1,85,000.

(iii) Calculate owner’s equity at the end of the period and also total equity from the given data.
Particulars Amount
(Rs)

50,000
Owner Equity in the beginning of the period
Creditor’s Equity at the end of the period
45,000
Revenue during the period
25,000
Expenses during the period
10,000

Solution

(i) Total Assets = Capital + Outside Liabilities

Total Assets = 40,000 + 22,000

= 62,000

(ii) Total Assets = Capital + Outside Liabilities

or Total Assets = Net Worth + Creditors

2,50,000 = 1,85,000 + Creditors

Creditors = 65,000

(iii) Owner’s Equity at the end of the period = Opening Owner's Equity + Revenue earned during the period – Expenses
incurred during the period

Owner’s Equity at the end of the period = 50,000 + 25,000 – 10,000.= 65,000.

Total Equity = Owner’s Equity + Creditor’s Equity

Total Equity = 65,000 + 45,000

= 1,10,000

Example 3 With the help of accounting equation and the data given below, describe the possible transactions for the
items (a) to (e).

[Link]. Cash + Stock + Fixed Assets = Capital + Liabilities

b/f 40,000 + 10,000 + 18,000 = 60,000 + 8,000

(a) - + (+) 6,000 - = - + (+) 6,000

(b) (-) 8,000 + - + (+) 12,000 = - + (+) 4,000

(c) (+) 5,000 - + (-) 6,000 = (-) 1,000 + -

(d) (+) 8,000 + (-) 4,000 + - = (+) 4,000 + -

(e) (-) 2,000 + (+) 7,000 + - = - + (+) 5,000

Solution:
In the above accounting equation, Cash Balance of Rs 40,000, Stock of Goods worth Rs 10,000, Fixed Assets of Rs 18,000,
Capital of Rs 60,000 and Liabilities amounting to Rs 8,000 have been brought forward from previous year.
The transactions on the basis of accounting equation (Total Assets = Capital + Outside Liabilities) are as follows:

(a) Since stock is increasing by Rs 6,000, this means that goods have been purchased i.e. either on cash or on credit. At
the same time as liabilities are increasing with the same amount i.e. Rs 6,000, it means these have been purchased on
credit. So, the above transaction is for recording “Goods purchased on credit worth Rs 6,000”.

(b) Here, fixed assets are increasing by Rs 12,000 with a simultaneous decrease in cash by Rs 8,000 and increase in
liabilities by Rs 4,000. This means, fixed assets have been purchased with part payment of Rs 8,000 in cash and balance
Rs 4,000 is our liability. Thus, “Fixed Assets worth Rs 12,000 purchased, out of which Rs 8,000 is paid in cash”.

(c) In this transaction, cash of Rs 5,000 is being received with a reduction in fixed assets worth Rs 6,000. And at the same
time, Rs 1,000 is being deducted from Capital. This means that Fixed Assets worth Rs 6,000 have been sold at a loss of Rs
1,000 i.e. for Rs 5,000. So, the transaction is, “Fixed Assets worth Rs 6,000 sold for Rs 5,000”.

(d) The given accounting equation shows that cash is increasing by Rs 8,000 while stock is reduced by Rs 4,000 only. Also,
capital is increasing by Rs 4,000. This means, Goods worth Rs 4,000 are being sold for Rs 8,000 i.e. at a profit of Rs 4,000
which is added to the capital. So, the transaction recorded above is, “Goods of Rs 4,000 sold for Rs 8,000”.

(e) Here in the above equation, cash is decreasing by Rs 2,000, Stock is increasing by Rs 7,000 and at the same time
Liabilities are increasing by Rs 5,000. This means that goods worth Rs 7,000 are being purchased and out of the sum due
Rs 2,000 are paid in cash and Rs 5,000 are still payable. This means the transaction is, “Goods worth Rs 2,000 are
purchased in cash and Rs 5,000 on credit”.

Example 4 Prove that the accounting equation is satisfied in all the following transactions of Amit.

(a) Commenced business with cash Rs 9,00,000.

(b) Rent paid in advance Rs 8,000

(c) Purchased goods for cash Rs 4,00,000 and for credit Rs 1,00,000.

(d) Sold goods costing Rs 3,00,000, for cash Rs 3,50,000.

(e) Paid Salaries Rs 8000 and Salaries outstanding Rs 2,000.

(f) Bought Car for personal use Rs 1,40,000.

Solution:

Capital

Assets = Liabilities +

(Rs)

Particulars
Rent paid
Cash Stock in Creditors
Salaries
+ + Advance +
(Rs) (Rs) (Rs) O/S (Rs)
(Rs)

(a) Commenced
9,00,000 = 9,00,000
business with Cash

(b) Rent paid in

(-)8,000 + - + (+)8,000 = -
Advance Rs 8,000

New Balance 8,92,000 + + 8,000 = + 9,00,000

(c) Purchased goods (-) + 5,00,000 + - = (+) 1,00,000 + - + -
for cash Rs 4,00,000 4,00,000
and on credit Rs
1,00,000

New Balance 4,92,000 + 5,00,000 + 8,000 = 1,00,000 + - + 9,00,000

(d) Sold goods

(+) (-)
costing Rs 3,00,000 + + - = - + - + (+) 50,000
3,50,000 3,00,000
for Rs 3,50,000

New Balance 8,42,000 + 2,00,000 + 8,000 = 1,00,000 + - + 9,50,000

(e) Paid Salaries Rs

8,000 and Salaries (-) 8,000 + - + - = - + (+) 2,000 + (-) 10,000
outstanding Rs 2,000

New Balance 8,34,000 + 2,00,000 + 8,000 = 1,00,000 + 2,000 + 9,40,000

(f) Purchased Car for

(-) (-)
personal use Rs + - + - = - + - +
1,40,000 1,40,000
1,40,000

New Balance 6,94,000 + 2,00,000 + 8,000 = 1,00,000 + 2,000 + 8,00,000

Here

Total Assets = Liabilities + Capital

Cash + Stock + Rent paid in Advance = Creditors + Salaries outstanding + Capital

6,94,000 + 2,00,000 + 8,000 = 1,00,000 + 2,000 + 8,00,000

9,02,000 = 1,02,000 + 8,00,000

9,02,000 = 9,02,000

So, Total Assets = Capital + Outside Liabilities

Hence, accounting equation is satisfied.

Example 5 Find the missing figures from the entries given below on the basis of accounting equation.

(a) Cash Rs 28,000, Loan from Ajit Rs 12,000, Machinery Rs 40,000, Goodwill Rs 5,000 and Capital Rs ?

(b) Capital Rs 90,000, Loan to Mr. PQR Rs 8,000, Bank O/D Rs 5,000, Machinery Rs 60,000, Debtors Rs 7,000 and Cash Rs
?

(c) Trade Creditors Rs 22,000, Advances given Rs 5,000, Prepaid Expenses Rs 2,000, Investment Rs 15,000, Reserves Rs
10,000, Cash Rs 21,000, Fixed Assets Rs 40,000 and Capital Rs ?

(d) Sundry Debtors Rs 19,000, Closing Stock Rs 10,000, Trademarks Rs 8,000, Outstanding expenses Rs 4,000, Loan Rs
10,000, Cash Rs 22,000 and Capital Rs ?

Solution:
We know that Accounting Equation is
Assets = Liabilities + Capital
Now, considering the above four cases one by one,

(a) Assets = Cash + Machinery + Goodwill

= 28,000 + 40,000 + 5,000

= 73,000

Liabilities = Loan from Ajit = Rs 12,000

And, As Assets= Liabilities + Capital

Capital = Assets – Liabilities

i.e. Capital = 73,000 – 12,000
= 61,000

So, Capital is Rs 61,000

(b) Assets = Loan to Mr. PQR + Machinery + Debtors + Cash

= 8,000 + 60,000 + 7,000 + Cash

= 75,000 + Cash

Liabilities = Bank O/D = Rs 5,000

Capital = Rs 90,000
Now, Assets= Liabilities + Capital
75,000 + Cash = 5,000 + 90,000
Cash = (95,000 – 75,000)
Cash = Rs 20,000

(c) Assets = Advance given + Prepaid Expenses + Investments + Cash + Fixed Assets

= 5,000 + 2,000 + 15,000 + 21,000 + 40,000

= 83,000
Liabilities = Reserves + Trade creditors
= 10,000 + 22,000
= 32,000
Now, Assets= Liabilities + Capital
Capital = Assets – Liabilities
= 83,000 – 32,000
= 51,000
So, Capital is Rs 51,000

(d) Assets = Sundry Debtors + Closing Stock + Trademarks + Cash

= 19,000 + 10,000 + 8,000 + 22,000

= 59,000
Liabilities = Outstanding expenses + Loan
= 4,000 + 10,000
 = 14,000
Capital = Assets – Liabilities
= 59,000 – 14000
= 45,000
So, Capital is Rs 45,000

Example 6 Show the effect of the following transactions on the accounting equations.

(a) MN Ltd. started business with

1. i) Cash Rs 3,40,000
ii) Goods Rs 1,50,000
iii) Building Rs 3,00,000

(b) They Purchased goods for cash Rs 80,000

(c) Sold goods (costing Rs 56,000) for Rs 75,000.
(d) Sold goods to Manoj (Costing Rs 18,000) for Rs 25,000
(e) Purchased goods from Sohan Rs 35,000
(f) Paid cash to Sohan in full settlement Rs 33,000
(g) Rent Outstanding Rs 8,000
(h) Depreciation charged on Building Rs 7,500
(i) Fresh capital Invested Rs 40,000
(j) Prepaid Insurance Rs 2,500

Solution:

Assets = Liabilities
Capital

Particulars +
Cash Building Prepaid Creditors Outstanding
Stock Debtors
+ + + + Expenses + Expenses (Rs)
(Rs) (Rs)
(Rs) (Rs) (Rs) (Rs) (Rs)

(a)
Commenced 3,40,000 + 1,50,000 + 3,00,000 = - + - + 7,90,000
business

(b) Goods
(-) (+)
Purchased + = -
80,000 80,000
for cash

New
2,60,000 + 2,30,000 + 3,00,000 + - + - = - + - + 7,90,00
Balance

(c) Sold
goods
(+) (-) (+)
costing + + - + - + - = - + - +
75,000 56,000 19,000
56,000 for
75,000

New
3,35,000 + 1,74,000 + 3,00,000 + - + - = - + - + 8,09,00
Balance
(d) Sold + (-) + + 25,000 + = + + (+) 7,00
Goods to 18,000
Manoj
(costing Rs
18,000) for
Rs 25,000

New
3,35,000 + 1,56,000 + 3,00,000 + 25,000 + - = - + - + 8,16,00
Balance

(e)
Purchased (+) (+)
+ + + + = + +
goods from 35,000 35,000
Sohan

New
3,35,000 + 1,91,000 + 3,00,000 + 25,000 + - = 35,000 + - + 8,16,00
Balance

(f) Paid
Cash to
(-) (-)
Sohan in full + = + - + (+) 2,00
33,000 35,000
settlement
Rs 33,000

New
3,02,000 + 1,91,000 + 3,00,000 + 25,000 + - = 0 + - + 8,18,00
Balance

(g) Rent
Outstanding + + + + = + (+) 8,000 + (-) 8,000
Rs 8,000

New
3,02,000 + 1,91,000 + 3,00,000 + 25,000 + - = 0 + 8,000 + 8,10,00
Balance

(h)
Depreciation
charged on + + (-) 7,500 + + = + + (-) 7,500
building Rs
7,500

New 3,02,000 + 1,91,000 + 2,92,500 + 25,000 + - = 0 + 8,000 + 8,02,50

Balance

(i) Fresh
Capital (+) (+)
+ + + + = + +
invested Rs 40,000 40,000
40,000

New
3,42,000 + 1,91,000 + 2,92,500 + 25,000 + - = 0 + 8,000 + 8,42,50
Balance

(j) Prepaid
Insurance (-) 2,500 + + + + (+) 2,500 = + +
Rs 2,500

New
3,39,500 + 1,91,000 + 2,92,500 25,000 + 2,500 = 0 + 8,000 + 8,42,50
Balance +

In the above Equation,

Total Assets = Liabilities + Capital

Cash + Stock + Building + Debtors + Prepaid

= Creditors + Outstanding Expenses + Capital
expenses

3,39,500+1,91,000+2,92,500+25,000+2,500 = 0 + 8,000 + 8,42,500

8,50,500 = 8,000 + 8,42,500

8,50,500 = 8,50,500

So, Assets = Liabilities + Capital, i.e. Accounting Equation is satisfied.