DSU – CMS - EMBA – 1

ACCOUNTING FOR MANAGERS - 18EPG102

ASYNCH ACTIVITY 1- EFFECT OF BUSINESS TRANSACTIONS ON ACCOUNTING EQUATION

Activity 1: Identify / Start a business – Trading / Service / Manufacturing

Designer Nisha wants to starts her own company which engages in manufacturing and supplying wide range of
formal uniforms and sportswear to schools and sporting goods retailer. Her main clients are National Public
School (NPS) and Sahara Sports Center.

Paramount Clothing and Omis collections are the wholesale suppliers of various fabrics and materials to her
company.

Activity 2: Select/Decide the forms of ownership of the business organization

Nisha named her company as “Perfect Juniors Apparel”.

She is the sole owner of the company as it’s her first new start-up venture.

Activity 3: Interact with your / any company accountants to know business Transaction
Business transaction is an economic consideration involving an interchange of goods, money or services
between two or more parties and have two-fold effects that are recorded in at least 2 transactions.
It can be between two business parties engaged in business and transaction for their mutual benefits.

Activity 4: Read a text to know assets, liabilities and equity

Three examples for Assets, Liability and Equity:

Assets Liability Equity

•Land and Buildings •Accrued expenses •Additional Paid-in Capital

•Office Equipments, Tools •Income tax payable •Retained Earnings
and Machinery •Bank loans •Treasury Stock
•Good will and Patents
Activity 5 : Analyse the relationship between assets, liabilities and equity
Accounting Equation signifies that the Assets of a business are always equal to the total Liabilities and
Capital (owner’s equity)

Assets = Capital + Liabilities ( A= C + L )

Capital = Assets – Liabilities (C=A-L)

Liabilities = Assets – Capital (L=A-C)

Activity 6: Identify TEN different possible transactions in the business described by you in point 1

List of 10 transactions of Perfect Juniors Apparel

1. Nisha commenced her business with cash of Rs.5,00,000

2. She purchases uniform fabric from Paramount clothing for cash of Rs.2,00,000

3. She purchases accessories for uniform material on credit for Rs.1,50,000 from Omis collection

4. She buys sewing machine for the business from Singer Fashions for cash of Rs.80,000

5. Nisha paid rent of Rs.30, 000 to the building landlord (Mr. Murthy)

6. New set of school uniforms, cash costing of Rs.1,75,000 were sold to NPS for Rs. 2,50,000

7. She paid Rs.1, 00,000 to creditors (Omis collection)

8. As Nisha had some urgency she withdrew cash of Rs. 15,000 for her personal use

9. She paid Rs. 40,000 salary for her 4 employees

10. Football T-shirts, credit costing of Rs.80, 000 were sold to Sahara Sports Center for Rs. 1,90,000
Activity 7: Analyse the impact/effect of each such transactions on the accounting equation one after another

and

Activity 8: Measure the assets, liabilities and equity of the business at the end of 10th transaction

Note: Activity 7 and 8 are represented below:

Transaction 1: Nisha commenced business with cash Rs.5,00,000

 Nisha’s new start-up company “Perfect Juniors Apparel” has received assets totalling of Rs.5,00,000 in
the form of cash and the claims against the company in the form of capital which is also Rs.5,00,000.

The transaction can be expressed in the form of an accounting equation as mentioned below:

Assets = Capital + Liabilities

Cash = Capital + Liabilities

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors’ Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 1 5,00,000 0 0 0 - 5,00,000 0 -

Total 5,00,000 0 0 0 5,00,000 5,00,000 0 5,00,000

Here is the Accounting equation for the Transaction 1: Assets (5,00,000) = Capital (5,00,000) + Liabilities (0)

Transaction 2: She purchases uniform fabric from Paramount clothing for cash of Rs.2,00,000

 In this transaction one asset (cash) is decreased and at the same time the other asset (stock) is
increased with the same amount.
 Here the total of the assets of the business is unchanged.

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors’ Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 1 5,00,000 0 0 0 - 5,00,000 0 -

Transaction 2 (-) 2,00,000 (+) 2,00,000 0 0 - 0 0 -

Total 3,00,000 2,00,000 0 0 5,00,000 5,00,000 0 5,00,000

Here is the Accounting equation for the Transaction 2: Assets (5,00,000) = Capital (5,00,000) + Liabilities (0)
Transaction 3: She purchases accessories for uniform material on credit for Rs.1,50,000 from Omis collection

 This transaction will increase the stock value of Rs.1.50,000 on the assets side
 A Liability is created in the form of Creditors for Rs.1,50,000

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors’ Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 3,00,000 2,00,000 0 0 - 5,00,000 0 -
1+2
Transaction 3 0 (+)1,50,000 0 0 - 0 1,50,000 -

Total 3,00,000 3,50,000 0 0 6,50,000 5,00,000 1,50,000 6,50,000

Here is the Accounting equation for the Transaction 3: Assets (6,50,000) = Capital ( 5,00,000) + Liabilities (1,50,000)

Transaction 4: She buys sewing machine for the business from Singer Fashions for cash of Rs.80,000

 The cash is reduced by 80,000 but the new asset(machinery) of the same amount has been acquired
which has increased its value by Rs.80,000
 There is a decrease in one asset(cash) and parallelly there is an increase in another asset(machinery)
with the same amount
 Here the total of the assets of the business is unchanged

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 3,00,000 3,50,000 0 0 - 5,00,000 1,50,000 -
1+2+3
Transaction 4 (-) 80,000 0 (+) 80,000 0 - 0 0 -

Total 2,20,000 3,50,000 80,000 0 6,50,000 5,00,000 1,50,000 6,50,000

Here is the Accounting equation for the Transaction 4: Assets (6,50,000) = Capital (5,00,000) + Liabilities (1,50,000)

Transaction 5 : Nisha paid rent of Rs.30, 000 to the building landlord (Mr. Murthy)

 The cash asset is decrease by Rs.30,000 on the asset side as rent is an expense to the business
 This results in a loss which decreases the capital by Rs. 30,000

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 2,20,000 3,50,000 80,000 o - 5,00,000 1,50,000 -
1+2+3+4
Transaction 5 (-) 30,000 0 0 0 - (-) 30,000 0 -

Total 1,90,000 3,50,000 80,000 0 6,20,000 4,70,000 1,50,000 6,20,000

Here is the Accounting equation for the Transaction 5: Assets (6,20,000) = Capital (4,70,000) + Liabilities (1,50,000)
Transaction 6: New set of school uniforms, cash costing of Rs.1,75,000 were sold to NPS for Rs. 2,50,000

 Here cash asset will increase by Rs.2,50,000 for the new goods sold in cash
 The stock of goods will be reduced by 1,75,000 which is the cost of the new uniforms sold.
 The net increase of Rs.75,000 is the amount of revenue which will be added to the capital

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 1,90,000 3,50,000 80,000 0 - 4,70,000 1,50,000 -
1+2+3+4+5
Transaction 6 (+) 2,50,000 (-) 1,75,000 0 0 - (+) 75,000 0 -

Total 4,40,000 1,75,000 80,000 0 6,95,000 5,45,000 1,50,000 6,95,000

Here is the Accounting equation for the Transaction 6: Assets (6,95,000) = Capital (5,45,000) + Liabilities (1,50,000)

Transaction 7: She paid Rs.1, 00,000 to creditors (Omis collection)

 Here Rs.1,00,000 was paid to creditors resulting in decrease of Cash asset

 This also reduces liability by Rs.1,00,000

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 4,40,000 1,75,000 80,000 0 - 5,45,000 1,50,000 -
1 to 6
Transaction 7 (-) 1,00,000 0 0 0 - 0 (-)1,00,000 -

Total 3,40,000 1,75,000 80,000 0 5,95,000 5,45,000 50,000 5,95,000

Here is the Accounting equation for the transaction 7: Assets (5,95,000) = Capital (5,45,000) + Liabilities (50,000)

Transaction 8: As Nisha had some urgency, she withdrew cash of Rs. 15,000 for her personal use

 Here the cash asset decreases by 15,000 as cash was withdrawn

 This will also decrease the capital value by 15,000

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 3,40,000 1,75,000 80,000 0 - 5,45,000 50,000 -
1 to 7
Transaction 8 (-) 15,000 0 0 0 - (-) 15,000 0 -

Total 3,25,000 1,75,000 80,000 0 5,80,000 5,30,000 50,000 5,80,000

Here is the Accounting equation for the transaction 8: Assets (5,80,000) = Capital (5,30,000) + Liabilities (50,000)
Transaction 9: She paid Rs. 40,000 salary for her 4 employees

 The cash is decrease by Rs.40,000 on the asset side as salaries were paid is an expense to the business
 This results in the decrease of capital value by Rs. 40,000

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 3, 25,000 1,75,000 80,000 0 - 5,30,000 50,000 -
1 to 8
Transaction 9 (-) 40,000 0 0 0 - (-) 40,000 0 -

Total 2,85,000 1,75,000 80,000 0 5,40,000 4,90,000 50,000 5,40,000

Here is the Accounting equation for the transaction 9: Assets (5,40,000) = Capital (4,90,000) + Liabilities (50,000)

Transaction 10: Football T-shirts, credit costing of Rs.80, 000 were sold to Sahara Sports Center for Rs.
1,90,000

 In this transaction there is a new asset added in the form of Debtors to the extent of Rs 2,15,000
 The stock of goods will be reduced by 80,000 which is the cost of goods sold (football-shirts).
 The net increase of Rs.80,000 is the amount of revenue which will be added to the capital

Assets Capital + Liabilities

No. of Cash Stock Machinery Debtors Total Capital Liabilities / Total
Transactions Balance Creditors Balance
Transaction 2,85,000 1,75,000 80,000 0 1,60,000 4,90,000 50,000 -
1 to 9
Transaction 0 (-) 80,000 0 2,15,000 - (+)1,35,000 0 -
10
Total 2,85,000 95,000 80,000 2,15,000 6,75,000 6,25,000 50,000 6,75,000

Here is the Accounting equation for the transaction 10: Assets (6,75,000) = Capital (6,25,000) + Liabilities (50,000)

Activity 9: Browse/search for the meaning of balance sheet

A balance sheet is a financial statement of a company or business organisation that reports its assets,
liabilities and net worth/capital at a point in time.

Activity 10: Prepare a balance sheet of your business on your own based on the 10 transactions
identified in point 6 or point 8
Balance Sheet of Perfect Juniors Apparel as on AUGUST 2020:
Liabilities Amount Assets Amount
Capital 6,25,000 Cash 2,85,000
Creditors 50,000 Stock 95,000
Machinery 80,000
Debtors 2,15,000
6,75,000 6,75,000
The Balance Sheet is the statement that represents the last equation appearing in the books of Ms.Nisha’s
company - Perfect Juniors Apparel