NT IN G
ACC OU
U AT IO N
EQ
Ch:20 ACCOUNTING EQUATION
ACCOUNTING EQUATION
The accounting equation forms the cornerstone of the balance sheet and is
fundamental in accounting principles. It enables companies to compile balance
sheets to verify that total assets match liabilities and stockholder equity. This
equation underpins the double-entry accounting system.
Double-entry accounting ensures that transactions balance, impacting both sides of
the equation. Any alteration in asset accounts necessitates corresponding
adjustments in related liability and stockholder equity accounts. When making
journal entries, adherence to the accounting equation is essential.
Accounting Eq → {Assets = Capital + Liabilities}
EFFECTS OF TRANSACTION ON EQ
Examples of accounting equation samajh ke padh mei fail
nahi hone dunga tujhe
1. Ram started business with cash Rs. 10,000:
Transaction Analysis:
Assets (Cash): Increases by Rs. 10,000
Liabilities (Capital): Increases by Rs. 10,000
Explanation:
This transaction exemplifies the basic accounting equation: Assets = Liabilities
+ Owner's Equity (Capital). When Ram starts the business with Rs. 10,000 cash,
both sides of the equation increase by the same amount, maintaining the
balance.
2. Goods sold to Shyam on credit for Rs. 5,000:
Transaction Analysis:
Assets (Stock/Inventory): Decreases by Rs. 5,000
Assets (Debtors/Accounts Receivable): Increases by Rs. 5,000
Explanation:
When goods are sold on credit, the inventory (an asset) decreases because it's no
longer available for sale, and simultaneously, accounts receivable (another
asset) increases because Shyam owes Rs. 5,000 to the business.
3. Paid rent Rs. 500:
Transaction Analysis:
Assets (Cash): Decreases by Rs. 500
Liabilities (Capital): No change
Explanation:
Paying rent reduces cash (an asset) because the business uses cash to settle an
obligation. There is no impact on liabilities or owner's equity (capital) in this
transaction
Classification of Transactions Following are the nine basic transactions:
1. Increase in assets with corresponding increase in capital.
2. Increase in assets with corresponding increase in liabilities.
3. Decrease in assets with corresponding decrease in capital.
4. Decrease in assets with corresponding decrease in liabilities.
5. Increase and decrease in assets.
6. Increase and decrease in liabilities
7. Increase and decrease in capital
8. Increase in liabilities and decrease in capital
9. Increase in capital and decrease in liabilities.
Example:
Show the effect of the following business transactions on assets, liabilities and
capital through accounting equations:
1. Commenced business with cash 20,000
2. Goods purchased on credit 7,000
3. Furniture purchased 3,000
4. paid to creditors 2,000
5. Amount withdrawn by the proprietor 4,000
6. Creditors accepted a bill for payment 1,500
7. Interest on capital 1,000
8. Transfer from capital to loan 5,000
9. Allotted shares to creditors 1,000
Important note
Assets = Liabilities +Capital
Assets are equal to the sum total of Liabilities and Capital
Important Questions with Answers
1. Calculate total liability if: 1. Creditors at the end is 50,000. 2. Owner's capital in
the beginning is 60,000. 3. Revenue during the period is 70,000. 4. Expenses during
the period are 65,000. Also calculate amount of owner's capital at the end.
Answer:
Total Liability = Owner's Capital at the end + Creditors
=65,000 + 50,000 = 1,15,000.
Owner's Capital at the end = Owner's Capital in the beginning +
Revenue -
Expenses =60,000 +70,000- 65,000 = 65,000.
2. If the capital of a business is ₹70,000 and liabilities are of ₹ 40,000, calculate
the total assets.
Answer: Total Assets =Capital + Liabilities
= 70,000 + 40,000 = 1,10,000
3. A commenced his cloth business on 1st April, 2020 with a capital of ₹ 30,000.
On 31st March, 2021 his assets were 50,000 and liabilities were 10,000. Find out his
closing capital and profits earned during the year.
Answer: Total Assets Capital =Liabilities + Capital
50,000= 10,000 + capital
Closing Capital=₹50,000 + ₹10,000
=₹40,000
Profit = Closing Capital - Opening Capital =40000 -
30,000
= 10,000.
NOTE : Worksheet (Important questions of all typology with
answers) is provided as a seperate PDF on website
padhleakshay.com
