ACCOUNTING Prepared by : Lamiyah Fawad

EQUATION Khan
CONTENTS:
1. Separate Entity Concept / Business Entity Concept
2. Duality Concept
3. Accounting Equation
4. Expanded Form of Accounting equation
DUALITY CONCEPT:
Every transaction has two effects which are equal and opposite to each other.
DR. DR.& = CR.
CR.
Thumb Rule:
Debit Credit
Expense Liabilities
Asset Income
Drawings Capital

Whereas, profits are credit in nature and losses are debit in nature
Increase in same nature
Decrease in opposite nature
For example increase in asset is debit & decrease in asset is credit
Increase in liability is credit & decrease in liability is debit
ACCOUNTING EQUATION
ASSETS = LIABILITIES +
CAPITAL

Allocation of Funds Sources of Funds

Asset is what business OWNS
Liability is what business OWES
Capital how much business OWES to owner
EFFECT OF SOME IMPORTANT
TRANSACTIONS ON
ACCOUNTING EQUATION
QUESTION 03
1. Investment by the owner $50,000
2. Borrowing of $30,000 from bank
3. Purchase of $40,000 on cash
4. Purchase of inventory $5,000 on credit
5. Payment of $5,000 to a trade payable
6. Sale of inventory of $3,000 for $5,000 on credit
7. Receipt of $5,000 from a trade receivable
8. Drawings of $2,000 by the owner
9. Withdrawal of $1,000 from bank by the owner to pay office repairs
10. Receipt of electricity bill of $3,000
11. Payment of electricity bill that was due/outstanding
EXPANDED FORM OF
ACCOUNTING EQUATION
Assets – Liabilities = Capital / net assets / Equity
Opening net assets = Opening assets - Opening liabilities
Closing net assets = Closing assets – Closing liabilities
Closing net assets / Closing capital = Opening capital + Additional capital + Profit/
(loss) – drawings
Change in net assets = Additional capital + Profit/ (loss) – drawings
Net current assets / Working capital = Current assets – Current liabilities
Net Assets = Total Assets – Total liabilities