Accounting Equation

Accounting equation is considered to be the

foundation of the double entry system
 Accounting equation shows total assets are
equal to the sum of the liabilities and capital
Assets = Liabilities + Capital
Or
Liabilities = Assets - Capital
Or
Capital = Assets - Liabilities
 Example 1
Show effect of following transaction on accounting equation
1. Business started with cash Rs.100,000
2. Goods purchased for cash Rs.50,000
3. Goods Purchased from Rohan Rs.70,000 on Credit
4. Goods sold for cash Rs.80,000
5. Goods sold to Rabindra of Rs. 40,000 on credit
6. Payment made to Rohan Rs. 70,000
7. Received Rs.40,000 from Rabindra
 Effect of Transaction on Accounting
Equation
Transactions Assets = Liabilities + Capital

1.Business Started with Cash- 100,000 Nil Capital -100,000

cash Rs.100,000
2. Goods Purchased for Cash – 50,000 Nil Capital -100,000
Cash Rs.50,000 Goods – 50,000
3. Goods Purchased Cash- 50,000 Rohan- 70,000 Capital – 100,000
from Rohan Rs. 70,000 Goods- 120,000
on Credit

4. Goods sold for cash Cash -130,000 Rohan – 70,000 Capital- 100,000
Rs. 80,000 Goods- 40,000
5. Goods sold to Cash – 130,000 Rohan- 70,000 Capital- 100,000
Rabindra Rs 40,000 on Rabindra- 40,000
credit

6. Payment made to Cash – 60,000 Nil Capital- 100,000

Rohan Rs. 70,000 Rabindra- 40,000
7. Received Rs.40,000 Cash- 100,000 Nil Capital -100,000
 Example 2
Show the effect of following transaction on accounting equation
1. Business started with cash Rs.5,00,000
2. A Computer purchased for cash Rs.20,000
3. Goods purchased for cash Rs.2,00,000
4. Salary paid Rs.30,000
5. Goods (costing Rs.1,50,000) sold for Rs.1,70,000
6. Rs.20,000 taken by owner for personal expenses
 Effect of Transaction on Accounting
Equation
Transactions Assets = Liabilities Capital
+
1.Business Started with Cash- 500,000 Nil Capital -500,000
cash Rs.500,000
2. A computer Cash – 480,000 Nil Capital -500,000
Purchased for cash Rs Computer– 20,000
20,000
3. Goods Purchased for Cash- 280,000 Nil Capital – 500,000
cash Rs.200,000 Computer- 20,000
Goods- 200,000

4. Salary paid Rs. 30,000 Cash – 250,000 Nil Capital- 470,000

Computer- 20,000
Goods - 200,000
5. Goods (Costing Rs. Cash – 420,000 Nil Capital- 490,000
150,000) sold for Rs. Computer- 20,000
170,000 Goods- 50,000

6. Rs. 20,000 taken by Cash – 400,000 Nil Capital- 470,000

owner for his personal Computer – 20,000
 Example 3
Show the effect of following transactions on accounting
equation:
1. Business started with cash Rs.10,00,000
2. Goods Purchased for cash Rs. 3,00,000
3. Goods purchased from Prakash on credit Rs. 2 00,000
4. Cash Sale Rs. 2,50,000
5. Goods sold to Santosh on credit Rs. 2,00,000
6. Furniture Purchased for cash Rs. 30,000
7. Rs. 20,000 taken by owner for personal use
8. Salary paid Rs. 30,000
9. Cash received from Santosh Rs. 2,00,000
10. Payment made to Prakash Rs. 2,00,000
 Effect of Transaction on Accounting
Equation
Transactions Assets = Liabilities Capital
+
1.Business Started with Cash- 10,00,000 Nil Capital -10,00,000
cash Rs.10,00,000

2. Goods purchased for Cash – 7,00,000 Nil Capital -10,00,000

cash Rs. 300,000 Goods - 300,000

3. Goods Purchased from Cash- 7,00,000 Prakash-200,000 Capital – 10,00,000

Prakash on credit of Goods- 500,000
Rs.200,000

4. Cash Sale Rs. 2,50,000 Cash – 9,50,000 Prakash -2,00,000 Capital- 10,00,000
Goods - 2,50,000

5. Goods sold to Santosh Cash – 9,50,000 Prakash -2,00,000 Capital- 10,00,000

on credit Rs. 200,000 Goods - 50,000
Santosh - 2,00,000
 Cont….d
Transactions Assets = Liabilities + Capital

6.Furniture purchased for Cash- 920,000 Prakash- 2,00,000 Capital -10,00,000

cash Rs. 30,000 Goods- 50,000
Santosh- 2,00,000
Furniture – 30,000
7. Rs. 20,000 taken by Cash – 9,00,000 Prakash – 2,00,000 Capital -9, 80,000
owner for personal use Goods - 50,000
Santosh - 2,00,000
Furniture - 30,000
8. Salary Paid Rs. 30,000 Cash- 8,70,000 Prakash - 2,00,000 Capital – 9,50,000
Goods- 50,000
Santosh- 200,000
Furniture - 30,000
9. Cash received from Cash – 10,70,000 Prakash – 200,000 Capital- 9,50,000
Santosh Rs. 2,00,000 Goods - 50,000
Furniture- 30,000
10. Payment made to Cash – 8,70,000 Nil Capital- 9,50,000
Prakash Rs. 200,000 Goods- 50,000
Furniture - 30,000
 Example 4
1. Business started with cash Rs. 8,00,000
2. Goods purchased for cash Rs. 2,50,000
3. Laptop purchased for business Rs. 40,000
4. Goods (costing Rs . 1,80,000), sold for cash Rs. 1,90,000
5. Rent paid Rs. 20,000
6. Goods purchased from Ganesh on credit Rs. 2,00,000
7. Goods worth Rs. 20,000 destroyed by fire
8. Goods sold to Rohan for cash Rs. 100,000
9. Paid Rs.2,00,000 to Ganesh
10. Goods worth Rs.10,000 taken by owner for personal use
 Example 5
1. Rajesh started business by introducing cash Rs. 700,000 and
goods worth Rs. 100,000
2. Furniture Purchased for Rs. 50,000
3. Goods purchased for cash Rs. 3,00,000
4. Goods (costing Rs. 1,50,000) sold for Rs. 1,45,000
5. Salary paid Rs. 40,000
6. Goods purchased from Kartik on credit Rs. 100,000
7. Goods sold to Dinesh on credit Rs. 1,20,000
8. Rs. 20,000 given as donation
9. Dinesh declared as insolvent being 50 paisa of a Rupee
received from him
10. Rs 5000 taken by owner for personal use
 Example 6
Show the effect following transactions on accounting equation
1. Business started with cash Rs. 25,00,000
2. Goods Purchased for Rs. 10,00,000
3. Goods ( costing Rs. 8,00,000 ) sold for Rs. 8,50,000
4. Goods Purchase from Jogendra on credit Rs. 5,00,000
5. Commission received Rs. 20,000
6. Goods sold of Rs. 4,00,000, amount received by cheque
7. Paid to Jogendra Rs. 4,00,000 by cheque and Rs. 100,000 by
cash
8. Interest paid Rs.10,000
9. Advertisement Expenses Rs. 50,000
10. Rs 50,000 taken by owner for personal use