Chapter 02 Transaction and Accounting Equation

Important Definitions:

Transaction:
“A business event which can be measured in terms of money and which must be
recorded in the books of accounts is called a transaction.”
‫کاروبار میں رونما ہونے والی کو ئی بھی ایسی تبدیلی جو رہوپے پیسےکی شکل میں ہو اور وہ کاروبار کے‬
‫نتائج پر بھی اثر انداز ہوتی ہو وہ کاروباری لین دین کہالئے گی۔‬
Types of Transactions:
Cash Transaction:
“When the value of a transaction is met in cash immediately it is called cash
transaction.”
‫جب کسی لین دین کی ادائیگی نقد کیش کی صورت میں موقع پر ہی کر دی جائے تو اسکو نقد لین دین کہتے‬
‫ہیں۔‬
Examples:
Purchased goods for cash Rs. 2,000/-
Purchased goods Rs. 2,000/-
Purchased goods from Hassan for cash Rs. 2,000/-

Credit Transition:
When the value of a transaction is not met in cash immediately but a promise is made
to pay in some future date it is called credit transaction.”
‫جب کسی لین دین کی ادائیگی نقد کیش کی صورت میں موقع پرنہ کی جائےبلکہ مستقبل میں کسی تاریخ کو‬
‫کرنی ہو تو اسکو ادھارلین دین کہتے ہیں۔‬
Examples:
Purchased goods on credit for Rs. 2,000/-
Purchased goods on account for Rs. 2,000/-
Purchased goods from Hassan for Rs. 2,000/-

External Transaction:
“A transaction taking place with an outside person or organization is called external
transaction.”
‫ایسا لین دین جو کسی باہر کی پارٹی کے ساتھ کیا جائے بیرونی لین دین کہالتا ہے۔‬
Example: Purchased furniture from Hassan.

Internal Transaction:
“A transaction in which no outside person or organization is involved is called
internal transaction.”
‫ایسا لین دین جس میں کوئی باہر کی پارٹی شامل نہ ہو اندرونی لین دین کہالتا ہے۔‬

1
Example: Loss of machinery in an accident.
Paper Transaction:
“When there is no question of meeting the value of transaction it is called paper
transaction.”
‫جب کسی لین دین کی ادائیگی کا سوال ہی پیدا نہ ہو تو اسکو کاغذی لین دین کہتے ہیں۔‬
Business Event:
“Any change which happens in business is called a business event.”
‫کوئی بھی تبدیلی جو کاروبار میں رونما ہو وہ کاروباری واقعہ کہالتی ہے۔‬
Types of Business Event:
Monetary Events:
“Events which are related with money and which change the financial position of a
person or business are known as monetary events.”
‫ایسا واقعہ جسکا تعلق رقم کے ساتھ ہو اور جس سے کاروبار کی مالی حالت بھی تبدیل ہو وہ مالیاتی واقعہ‬
‫کہالتا ہے۔‬
Example: Purchase of goods

Non-monetary Events:
“Events which are not related with money and which do not change the financial
positions of a person or business are known as non- monetary events.”
‫ایسا واقعہ جسکا تعلق رقم کے ساتھ نہ ہو اور جس سے کاروبار کی مالی حالت میں بھی کوئی تبدیلی نہ‬
‫آئے وہ غیر مالیاتی واقعہ کہالتا ہے۔‬
Example: Winning a game.
Types of Change
Quantitative Change:
“If the total value of assets and liabilities changes after recording a transaction in
accounting equation that change will be called quantitative change.”
‫جب کسی لین دین کو اکاؤنٹنگ کی مساوات میں درج کرنے سے کاروبارکے ٹوٹل اثاثہ جات اورواجبات‬
‫تبدیل ہو جائیں تو یہ مقداری تبدیلی کہالتی ہے۔‬
Example: Purchased machinery on credit.
Qualitative Change:
“If the total value of assets and liabilities remain unchanged after recording a
transaction in accounting equation, that change will be called qualitative change.”
‫جب کسی لین دین کو اکاؤنٹنگ کی مساوات میں درج کرنے سے کاروبارکے ٹوٹل اثاثہ جات اورواجبات‬
‫تبدیل نہ ہوں تو یہ وصفی تبدیلی کہالتی ہے۔‬
Example: Purchased machinery for cash.

Accounting Equation:
“The expression of the equality of an entity’s assets with the claims against them is
referred to as accounting equation.”
'
Assets=Liabilities+ Owne r s Equity (Capital)

2
 ‫جب کسی کاروبارکے اثاثہ جات اور واجبات کے تعلق کو ایک مساوات کی شکل میں لکھا جاتا ہے تاکہ‬
‫کاروبار کی مالی حالت کو ایک نظر میں دیکھا جا سکے۔ اس مساوات کو اکاؤنٹنگ کی مساوات کہتے ہیں۔‬
Equities:
“The rights of the owners and creditors over the assets of the business are called
equities.”
‫کاروبار کے اثاثہ جات پر کاروبار کے مالک اور دوسرے لوگ یعنی قرض خواہوں کے حقوق کو مالکانہ‬
‫حقوق کا نام دیا جاتا ہے۔‬
Types of Equities
Internal Equity:
“The rights of the owner over the assets of the business are called Owner’s equity.”
‫کاروبار کے اثاثہ جات پر کاروبار کے مالک کےحقوق کو مالک کا حق یا سرمایہ کا نام دیا جاتا ہے۔‬
External Equity:
“The rights of the creditors over the assets of the business are called external equity.”
‫کاروبار کے اثاثہ جات پر کاروبار کے مالک کےعالوہ دوسرے لوگوں کے حقوق کوبیرونی حقوق یا‬
‫واجبات کا نام دیا جاتا ہے۔‬

EFFECTS OF BUSINESS TRANSACTION UPON THE ACCOUNTING EQUATION

Transaction
1. Investment by the owner
2. Purchase of an Asset
3. Purchase of goods for cash
4. Purchase of goods on credit
5. Purchase of goods for cash & on
credit
6. Sales of goods for cash without
profit
7. Sales of goods for cash on profit
8. Sales of goods for on credit
9. Sales of goods for cash & on credit
10. Payment of expenses
11. Receiving Revenue
Effects on Accounting Equation
Assets = Liabilities + Owner’s Equity
i) Increase in Asset (Cash)
ii) Increase in Owner’s Equity (Capital)
i) Increase in Asset (Building/machinery)
ii) Decrease in Asset (Cash)
i) Increase in Asset (Goods)
ii) Decrease in Asset (Cash)
i) Increase in Asset (Goods)
ii) Increase in liability (Creditors)
i) Increase in Asset (Goods)
ii) Decrease in Asset (Cash)
iii) Increase in liability (Creditors)
i) Increase in Asset (Cash)
iii) Decrease in Asset (Goods)
i) Increase in Asset (Cash)
ii) Decrease in Asset (Goods)
iii) Increase in Owner’s Equity (Capital)
i) Increase in Asset (Debtor)
ii) Decrease in Asset (Goods)
iii) Increase in Owner’s Equity (Capital)
i) Increase in Asset (Cash)
ii) Increase in Asset (Debtor)
iii) Decrease in Asset (Goods)
iv) Increase in Owner’s Equity (Capital)
i) Decrease in Asset (Cash)
ii) Decrease in Owner’s Equity (Capital)
i) Increase in Asset (Cash)

3
 ii) Increase in Owner’s Equity (Capital)
12. Amount withdrawn by the owner i) Decrease in Asset Cash
ii) Decrease in Owner’s Equity (Capital)
13. Cash paid to creditors i) Decrease in Asset (Cash)
ii) Decrease in Liability (Creditors)
14. Expense paid in Advance i) Increase in Asset (Prepaid Expense)
ii) Decrease in Asset (Cash)
15. Outstanding Expenses i) Increase in Liability (Outstanding Exp)
ii) Decrease in Owner’s Equity (Capital)

Sample Question:
1. Mr Noman started business with cash Rs. 100,000/-
2. Purchase machinery for cash Rs. 20,000/-
3. Cash deposited into bank Rs. 10,000/-
4. Cash withdrawn from bank for business use. Rs.3000/-
5. Purchased goods for cash Rs. 15,000/-
6. Purchased goods on credit Rs. 20,000/-
7. Purchased goods for Rs, 15,000 from Aslam and paid cash Rs.7,000/-
8. Sold goods for cash Rs. Rs. 5,000/-
9. Sold goods for cash Rs. 10,000/- costing Rs. 8,500/-
10. Sold goods on credit Rs. 15,000/- costing Rs. 13,500/-
11. Paid cash to creditor (Supplier) of goods Rs. Rs. 10,000/-
12. Paid salaries Rs. 10,000/-
13. Paid commission by cheque Rs. 5,000/-
14. Charged depreciation on machinery @10% (2,000/-)
15. Received cash from debtors 10,000/-
16. Received commission Rs. 15,000/-
17. Paid Rent in advance Rs. 2,000/-
18. Cash withdrawn by the owner for his personal use. Rs. 4,000/-
19. Purchased refrigerator for the personal use of owner. Rs. 10,000/-
20. Received commission in advance Rs. 3,000/-
21. Goods of Rs. 1,000/- returned to supplier.
22. Goods of Rs. 500/- were returned by customer which were sold to him as Rs.450/-

Solution:
Mr. Noman
Accounting Equation
For the month of:----------------
Sr. No. Asset = Liabilities +Owner’s
Equity
Cash Machine Bank Goods Debtors Prepaid Unear Creditors Capital
ry Rent ned
Comm
ission
1 +100,000 +100,000
2 -20,000 +20,000
Balance 80,000 20,000 100,000

4
 3 -10,000 +10,000
Balance 70,000 20,000 10,000 100,000
4 +3,000 -3,000
Balance 73,000 20,000 7,000 100,000
5 -15,000 +15,000
Balance 58,000 20,000 7,000 15,000 100,000
6 +20,000 +20,000
Balance 58,000 20,000 7,000 35,000 20,000 100,000
7 -7,000 +15,000 +8,000
Balance 51,000 20,000 7,000 50,000 28,000 100,000
8 +5,000 -5,000
Balance 56,000 20,000 7,000 45,000 28,000 100,000
9 +10,000 -8,500 +1,500
Balance 66,000 20,000 7,000 36,500 28,000 101,500
10 -13,500 +15,000 +1,500
Balance 66,000 20,000 7,000 23,000 15,000 28,000 103,000
11 -10,000 -10,000
Balance 56,000 20,000 7,000 23,000 15,000 18,000 103,000
12 -10,000 -10,000
Balance 46,000 20,000 7,000 23,000 15,000 18,000 93,000
13 -5,000 -5000
Balance 46,000 20,000 2,000 23,000 15,000 18,000 88,000
14 -2,000 -2,000
Balance 46,000 18,000 2,000 23,000 15,000 18,000 86,000
15 +10,000 -10,000
Balance 56,000 18,000 2,000 23,000 5,000 18,000 86,000
16 +15,000 +15,000
Balance 71,000 18,000 2,000 23,000 5,000 18,000 101,000
17 -2,000 +2,000
Balance 69,000 18,000 2,000 23,000 5,000 2,000 18,000 101,000
18 -4,000 -4,000
Balance 65,000 18,000 2,000 23,000 5,000 2,000 18,000 97,000
19 -10,000 -10,000
Balance 55,000 18,000 2,000 23,000 5,000 2,000 18,000 87,000
20 +3,000 +3,000
Balance 58,000 18,000 2,000 23,000 5,000 2,000 3,000 18,000 87,000
21 -1,000 -1,000
Balance 58,000 18,000 2,000 22,000 5,000 2,000 3,000 17,000 87,000
22 +450 +500 -50
Balance 58,000 18,000 2,000 21,550 5,500 2,000 3,000 17,000 86,950
Total 106,950 = 106,950

5
 Practice Questions:
(i) Hassan commenced business with Cash Rs. 100,000/- Building Rs.50,000/- and Goods Rs. 30,000/-
(ii) Purchased Equipments for Rs.20,000/-
(iii) Purchased goods for cash Rs. 22,000/- and on credit Rs.18,000/-
(iv) Sold goods on credit to Aslam for Rs. 12,000/- costing Rs. 10,000/-
(v) Charge depreciation on building @10%
(vi) Paid cash to creditors of goods Rs. 8,000/-
(vii) Paid rent Rs. 7,000/- and rent outstanding Rs. 3,000/-
(viii) Sold a piece of land Rs. 40,000/-
(ix) Received commission Rs. 5,000/-
(x) Cash received from debtors of goods Rs.12,000/-

Solutio
n Mr.Hassan
Accounting Equation
For the month of ---------
Assets = Liabilities + Owner's Equity
Sr. No
Outstanding
Cash Building Goods Debtors Creditors Capital
Equipment Rent
(i) 100,000 50,000 30,000 180,000
(ii) (20,000) 20,000
Balance 80,000 50,000 30,000 20,000 180,000
(iii) (22,000) 40,000 18,000
Balance 58,000 50,000 70,000 20,000 18,000 180,000
(iv) (10,000) 12,000 2,000
Balance 58,000 50,000 60,000 20,000 12,000 18,000 182,000
(v) (5,000) (5,000)
Balance 58,000 45,000 60,000 20,000 12,000 18,000 177,000
(vi) (8,000) (8,000)
Balance 50,000 45,000 60,000 20,000 12,000 10,000 177,000
(vii) (7,000) 3,000 (10,000)
Balance 43,000 45,000 60,000 20,000 12,000 3,000 10,000 167,000
(viii) 40,000 (40,000)
Balance 83,000 5,000 60,000 20,000 12,000 3,000 10,000 167,000
(ix) 5,000 5,000
Balance 88,000 5,000 60,000 20,000 12,000 3,000 10,000 172,000
(x) 12,000 (12,000)
Balance 100,000 5,000 60,000 20,000 0 3,000 10,000 172,000
Totals 185,000 185,000

6
 2005 Rs.
1-Jun Selman started his business with cash 100,000
5-Jun Purchased furniture for cash 4,000
6-Jun Purchased goods for cash 25,000
10-Jun Paid transportation on goods purchased 1,000
12-Jun Sold goods for cash Rs. 15,000, Costing Rs. 11,000.
15-Jun Purchased goods on credit basis 15,000
19-Jun Sold goods to Rashid on credit basis for Rs. 8,000 costing Rs.6,500.
25-Jun Received cash from Rashid 4,000
28-Jun Cash paid to creditors 9,000
30-Jun Paid rent and salaries for the month 4,000

Mr. Salman
Accounting Equation
For the month of June, 2005
Owner's
Assets = Liabilities +
Date Equity
Cash Furnirue Goods Debtors Creditors Capital
1-Jun 100,000 100,000
5-Jun (4,000) 4,000
Balance 96,000 4,000 100,000
6-Jun (25,000) 25,000
Balance 71,000 4,000 25,000 100,000
10-Jun (1,000) (1,000)
Balance 70,000 4,000 25,000 99,000
12-Jun 15,000 (11,000) 4,000
Balance 85,000 4,000 14,000 103,000
15-Jun 15,000 15,000

Balance 85,000 4,000 29,000 15,000 103,000

19-Jun (6,500) 8,000 1,500
Balance 85,000 4,000 22,500 8,000 15,000 104,500
25-Jun 4,000 (4,000)
Balance 89,000 4,000 22,500 4,000 15,000 104,500
28-Jun (9,000) (9,000)
Balance 80,000 4,000 22,500 4,000 6,000 104,500
30-Jun (4,000) (4,000)
Balance 76,000 4,000 22,500 4,000 6,000 100,500

Total 106,500 Total = 106,500

7
 Practice Problems for Old Papers
Q.4(b) Prepare accounting equation from the following. (10 Marks)
(i) Started business with cash Rs.90000 and land Rs.60000
(ii) Purchase goods Rs.30000 for cash.
(iii) Paid wages Rs.9000
(iv) Withdraw cash for personal use Rs.15000
(v) Goods stolen Rs.2000

BISE-Sgd. Annual 2017

Q.4 From the following transactions of Ibrahim, prepare accounting equation. (20 Marks)

I. Started business with cash Rs 500

II. Bought goods for cash Rs 85
III. Bought goods from Ahmad Rs 116
IV. Paid freight Rs 50 on goods purchased
V. Returned goods of Rs 30 to Ahmad
VI. Sold goods for cash Rs 45 costing Rs 35
VII. Paid cash Rs 80 to Ahmad.
VIII. Goods sold to Karim for Rs 50 costing Rs 40
IX. Received Cash Rs 25 from Karim
X. Withdrew Cash Rs 20 for personal use

BISE-Sgd. Annual 2019

Q.5 Prepare Accounting Equation from the following particulars. (20 Marks)
i. Started business with cash Rs. 80,000.
ii. Purchased goods for cash Rs. 30,000.
iii. Purchased furniture on credit Rs: 8000.
iv. Sold goods for cash Rs. 40,000.
v. Paid electricity bill Rs. 2500.
vi. Cash paid to creditor from whom furniture was purchased Rs. 8,000.
vii. Salary paid Rs. 6,000.
viii. Purchased equipment Rs. 10,000.

BISE-Sgd. Annual 2022