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Introduction:
The entire financial accounting system is based on the accounting equation. As
we know that for operating a business unit we need the economic resources and
this is being supplied by some one. These economic resources which are
possessed by the business is known as assets. Is is obvious that some amount is
contributed by the proprietor of the business and some amount is contributed by
the out siders.. The amount contributed by the proprietor is known as capital and
the amount which owed by the business to the outsiders is known as liability. If
the total contribution is made by the proprietor, then the total assets equal to
equity or capital. However if the amount is contributed includes outsiders
amount in that case the total assets will be equal to capital and liability.
The two sides of equation will always be equal. On the one side total
resources possessed and on the other side it will represent from where all these
resources are obtained. The equity of two sides will always be true, no matter
how many transactions are entered in to. The actual assets, capital and liability
may change but the equality of the assets with that of total capital and liabilities
will always hold true.
Accounting Equation
The equation based on the principle that accounting deals with property and
rights to property and the sum of properties owned is equal to the sum of the
rights to the properties. The properties owned by a business are called assets
and the rights to properties are known as liabilities or equities to the business.
Equities may be divided in to equities of creditors representing debts of the
business known as liabilities and the equity of owner known as capital. Taking
this in to account, the accounting equation may be as below:
Assets = Liabilities +Capital
Or
Capital =Assets Liabilities
Or
Liabilities = Assets Capital
Assets: Assets are the economic resources of the organization. It includes both
tangible and intangible items. For example tangible assets include land, building,
furniture, machinery, goods, stock equipments etc. Similarly intangible assets
includes goodwill, copy right, patent, trademark etc.
Liabilities: It the amount of obligation of the organization to pay out siders. It
includes creditors, bills payable, bank overdraft, bank loan, outstanding
expenses, income received in advance etc.
Amount
10,000
3,000
6,000
Rent paid
Commission received
100
500
2,000
1,900
Example-2
Prepare accounting equation and balance sheet
Particulars
Amount
14,000
2,000
500
300
500
Example -3
Prepare accounting equation and balance sheet
Particulars
Amount
25,000
Purchased furniture
1,000
7,000
4,000
Rent received
1,000
ACCOUNTING EQUATIONS
cash
Started
business with
capital
10,000
goods
liability
10,000
(-)3,000
5,000
2,000
New equation
7,000
5,000
2,000
Sold goods
6,000
(-) 5,000
Purchased
goods
capital
10,000
1,000
New equation
13,000
Nil
2,000
(-) 1,000
Rent paid
Commission
received
Bank
taken
(-)1,000
12,000
New equation
Nil
2,000
500
10,000
500
12,500
Nil
2,000
2,000
loan
11,000
10,500
2,000
14,500
Nil
4,000
10,500
(-)2,000
100
2,000
10,600
New equation
Paid
creditors
to
(-) 1,900
12,600
Nil
New equation
Balance Sheet as on
Liabilities and capital
Amount
Assets
Amount
Capital
10,600
Cash
12,600
Creditors
2,000
12,600
12,600
Goods
Cash
Commenced
business
6,000
14,000
Purchased
goods
on
credit
2,000
New equation
8,000
Goods drawn
for
private
use
(-)500
New equation
7,500
Cash
withdrawn for
private use
New equation
7,500
20,000
14,000
2,000
20,000
(-)500
14,000
14,000
2,000
19,500
300
(-)300
2,300
19,200
(-) 500
7,500
Capital
2,000
Int.on capital
New equation
Liability
13,500
(-) 500
2,300
18,700
Balance Sheet as on
Liability and capital
Amount
Assets
Amount
Capital
18,700
Goods
7,500
Creditors
2,000
Interest due
Cash
13,500
300
21,000
21,000
3. Accounting equation of .. as on
Transactio
n
Bank
Commenc
ed
business
25,000
Furniture
purchase
d
New
equation
1,000
24,000
1,000
(-)3,000
New
equation
21,000
1,000
to
21,000
Goods
Debtor(Y)
Liability
Capital
25,000
(-)1,000
Purchase
d goods
Sold
goods
Y
FF
1,000
25,000
10,000
7,000
10,000
7,000
(-)3,000
4,000
7,000
4,000
25,000
1,000
7,000
26,000
New
equation
Rent
received
New
equation
1,000
1,000
22,000
1,000
7,000
4,000
7,000
27,000
Balance Sheet as on .
Liabilities and capital
Amount
Assets
Amount
Capital
27,000
Bank
22,000
7,000
Furniture
1,000
Goods
7,000
Debtors (Y)
4,000
34,000
34,000
Accounting:
It is process of recording the financial transactions in a systematic manner, with
the help of accepted and recognized principles laid down for this purpose; for
arranging,analyzing,summarizing,Classifying,Interpreting,and
providing
the
information to the interested parties.
Parties interested in accounting information:
Internal users
External users
Creditors
Management
Government
Employees
Consumers
General public
Other parties
payment
Cash transaction
Credit transaction
Mode
of
involved
entity
Mode of exchange
involved
External transaction
Internal transaction
Exchange transaction
Non-exchange transaction
deposited
in
the
Goods
sold
Rs1,000
to
Sravani
Good
returned
Sreemoti Rs5,000
from
Goods returned
Rs1,000
to
Sivani
Goods
purchased
Suman Rs6,000
from
Account:
An account is summarized record of relevant transactions relating to same
activity or particular head that has taken place during a given period. Separate
individual accounts are opened for every head of expenses, revenue, asset,
liability and capital. The accounts are maintained in ledger formats as shown
below which is discussed in chapter 5 in detail.
Dr
Dat
e
Cr
Particulars
J.F
Amount
Dat
e
Particulars
J.F
Amount
Amount
50,000
30,000
20,000
12,000
2,000
15,000
Answer:
Cash
Goods
Furniture
Capital
Liabilities
17,000
40,000
2,000
52,000
7,000
Amount
25,000
10,000
1,800
Answer:
Cash
Goods
Debtors
Capital
Liabilities
25,000
8,500
1,800
25,300
10,000
Amount
1,00,000
12,500
27,500
25,000
Paid rent
1,500
1,250
6,000
Answer:
Cash
Furniture
Debtors
Goods
Capital
Liabilities
80,000
11,250
25,000
7,500
96,250
27,500
Furniture
Goods
Capital
Liabilities
13,900
1,000
1,000
12,900
3,000
Pre-paid
rent
Goods
Capital
Liabilities
24,000
500
15,000
29,400
10,100
Investment
Capital
Liabilities
5,300
6,000
1,800
9,500
Goods
Furniture
Building
Capital
Liabilities
34,800
25,000
4,000
20,000
49,700
34,100
Goods
Prepaid
rent
Capital
Liabilities
52,500
10,000
1,000
53,500
10,000
Goods
Debtors
Capital
Liabilities
26,000
3,000
7,500
34,500
2,000
10.
Started business with Cash Rs9,000
Paid rent in advance Rs200
Purchased goods for cash Rs2,500 and on credit Rs1,000
Sold goods for cash Rs2,000 (costing Rs1,200)
Rent paid Rs500 and rent outstanding Rs100
Bought motor cycle for personal use Rs4,000
Purchased equipment for cash Rs250
Paid to creditors Rs300
Depreciation on equipments Rs25
Business expenses Rs200
Answer:
Cash
Goods
Advance
rent
Equipmen
ts
Capital
Liabilities
3,050
2,300
200
225
4,975
800
Goods
Equipments
Capital
Liabilities
1,100
2,050
7,200
7,800
2,550
Amount
70,000
14,000
1,700
10,000
Paid wages
300
Paid to creditors
10,000
15,000
4,000
Purchased furniture
500
Answer:
Cash
Goods
Debtors
Furniture
Capital
Liabilities
51,500
6,000
15,000
500
69,000
4,000
Amount
15,000
7,000
500
Deposited in to bank
2,000
6,000
200
300
Answer:
Cash
Goods
Furnitur
e
Bank
Debtors
Capital
Liabiliti
es
12,000
3,000
500
2,000
6,000
16,500
7,000
Amount
50,000
4,000
1,000
Furniture purchased
500
700
Paid rent
200
Received interest
100
700
Paid to creditors
400
Paid salaries
200
Answer:
Cash
Goods
Furniture
Debtors
Capital
Liabilities
47,100
4,500
500
700
49,200
3,600
Transactions
Accounts involved
Cash (A,
creditor(L)
goods(A)
and
Sold goods
Rs4,000
and
Cash (A),Rent(Capital)
Cash(A),Comm.(Capital)
for
cash
Rs6,000
costing
Answer:
Cash
Goods
Capital
Liabilities
14,500
1,000
11,500
4,000
Transactions
Accounts involved
Cash(A),Goods(A),Capital
Goods(A), X(L)
Goods(A),Drawings(Cap)
Int(Cap), liabilities
Cash (A),Bank(A)
Bank(A),Drawings(Cap)
Answer:
Cash
Goods
Bank
Capital
Liabilities
13,000
7,500
500
18,700
2,300
Transactions
Accounts involved
Furniture(A), Cash(A)
Cash(A),Goods(A),Cred
itors
(L)
Sold goods
Rs3,000
to
for
Rs4,000,costing
Y
(A),Goods(A),Profit(Ca
p)
Salary
,Cash(A)
(Capital)
Answer:
Goods
Cash
Bank
Furnitur
e
Debtors
(Y)
Capital
Liabiliti
es
7,000
6,400
15,000
1,000
4,000
26,400
7,000
Cash
Goods
Capital
Liabilities
4,000
34,500
5,800
42,500
1,800
Rent
receivabl
e
Prepaid
rent
Debtors
Capital
Liabilities
29,100
250
1,100
300
29,350
1,400
Goods
claim
Capital
Liabilities
10,000
5,000
1,200
16,200
Furniture
Capital
Liabilities
10,275
3,900
14,175