Accounting Equation:

• Accounting equation is the mathematical relationship among the elements of

accounting (Assets, Liabilities and owner’s equity). Assets are the economic
resources held by a business entity. Liabilities are the claims of the creditors
against those assets. Owner’s equity is the claims of the owners against the
remaining assets of the business. What is not claimed by the creditors is
claimed by the owners. Hence, the relationship among assets, liabilities and
owner’s equity can be expressed in the equation as follows.
Assets = Liabilities + owner’s equity (Shareholder’s equity)
Note:
1. Increase owner’s equity = Retained earning during the year.
Or
Increase owner’s equity = Ending owner’s equity – opening owner’s equity.
2. Retained earning during the year = Net income – dividend paid
3. owner’s equity = common stock( Equity share capital) + Retained earning
Note: Incomes and Expenses effect to owner’s equity
Owner’s equity increases by incomes and decreases by Expenses
 Q.N. 4 (brief)
Working Note
S.N. Related accounts
a Bank balance and Capital
b Stock and Creditors
c Stock(2000), Cash(2,500) and P/l a/c (Profit) (500)
d Stock(600), debtors (900) and p/l a/c (300)
 Q.N. 4 (brief)
Accounting Equation
S. N. Transactions Assets Liabilities Owner’s
equity

a Commenced Business +10,000 - +1o,ooo

Opening equation +10,000 - +10,000
b Stock purchased on credit +6,000 +6,000 -
New accounting equation +16,000 +6,000 +10, 000
C Stock sold on cash +2,500(cash) - +500
-2,000(Stock

New accounting equation +16,500 +6,000 +10,500

d Stock sold on credit +900(Debtors) - +300

-600(stock)

Closing accounting equation +16,800 +6,000 +10,800

 Q.N. 3 (Descriptive)
Working Note
S.N. Related accounts

a Bank balance and capital

b Interest (income) and Cash
c Salary (Exp.) and Bank balance
d Wages(exp) and Bank balance
e Supplies and Creditors
f Debtors and Service income
 Q.N. 3 (Descriptive)
Accounting Equation
S. N. Transactions Assets Liabilities Owner’s
equity
a Commenced business +50,000 - +50,000
Opening accounting equation +50,000 - +50,000
b Interest received from bank +2,000 - +2,000

New accounting equation +52,000 - +52,000

c Paid salary through cheque -1,000 - -1,000

New accounting equation +51,000 - +51,000

d Paid wages by cheque -500 - -500
New accounting equation +50,500 - +50,500
e Purchased supplies on credit +12,000 +12,000 -
New accounting equation +62,500 +12,000 +50500
f Provided service on account +15,000 - +15,000
Closing accounting equation +77,500 +12,000 +65,500
 Q.N. 5 (Descriptive)
Working Note
S.N. Related accounts
a Cash,(50,000),Bank balance (80,000), and Capital
(1,30,000)
b Stock(40,000), Cash(25,000) and Creditors (15,000)
c Cash and Wages
d Cash and Advance rent
e Cash(28,000), Stock(25,000) and P/L(profit) 3,000
f Cash (10,000), Salary exp(12,000) and Outstanding
salary (2,000)
 Q.N. 5 (Descriptive)
Accounting Equation
S.N Transactions Assets Liabilities Owner’s
equity
a Business started with cash and bank +50,000(cash) - +130,000
balance +80,000(bank)
Opening accounting equation +130,000 - +130,000
b Purchase stock on cash and credit +40,000(stock +15,000 -
-25,000(cash)

New accounting equation +145,000 +15,000 +130,000

c Wages paid to Som Tamang -1500 _ -1500
New accounting equation +143,500 +15000 +128,500
d Advance paid rent +5,000(adv. rent) - -
-5,000(cash)
New accounting equation +143,500 +15,000 +128,500
e Stock sold on profit +28,000(cash) - +3,000
-25,000(stock)

New accounting equation +146,500 +15,000 +131,500

f Salary paid and due salary -10,000 +2,000 -12,000
Closing accounting equation +136,500 +17,000 +119,500