Accounting Equation

Accounting Equation
Introduction:
The entire financial accounting system is based on the accounting equation. As
we know that for operating a business unit we need the economic resources and
this is being supplied by some one. These economic resources which are
possessed by the business is known as assets. Is is obvious that some amount is
contributed by the proprietor of the business and some amount is contributed by
the out siders.. The amount contributed by the proprietor is known as capital and
the amount which owed by the business to the outsiders is known as liability. If
the total contribution is made by the proprietor, then the total assets equal to
equity or capital. However if the amount is contributed includes outsiders
amount in that case the total assets will be equal to capital and liability.
The two sides of equation will always be equal. On the one side total
resources possessed and on the other side it will represent from where all these
resources are obtained. The equity of two sides will always be true, no matter
how many transactions are entered in to. The actual assets, capital and liability
may change but the equality of the assets with that of total capital and liabilities
will always hold true.
Accounting Equation
The equation based on the principle that accounting deals with property and
rights to property and the sum of properties owned is equal to the sum of the
rights to the properties. The properties owned by a business are called assets
and the rights to properties are known as liabilities or equities to the business.
Equities may be divided in to equities of creditors representing debts of the
business known as liabilities and the equity of owner known as capital. Taking
this in to account, the accounting equation may be as below:
Assets = Liabilities +Capital
Or
Capital =Assets Liabilities
Or
Liabilities = Assets Capital
Assets: Assets are the economic resources of the organization. It includes both
tangible and intangible items. For example tangible assets include land, building,
furniture, machinery, goods, stock equipments etc. Similarly intangible assets
includes goodwill, copy right, patent, trademark etc.
Liabilities: It the amount of obligation of the organization to pay out siders. It
includes creditors, bills payable, bank overdraft, bank loan, outstanding
expenses, income received in advance etc.
Capital: It the amount contributed by the proprietor to start a business. It is the

initial capital brought in to the business.
Example to various situations
Decrease in asset and decrease in owners capital - Cash withdrawn for

private use.
Decrease in asset and decrease in liabilities Amount paid to creditors.
Increase in one asset and decrease in another asset Purchased furniture.
Increase in asset and increase in owners capital Cash brought in to
business as capital.
Increase in asset and increase in liability Goods purchased on credit.
Increase in one liability, decrease in another liability - Bills payable issued
to the creditor.
Increase in capital and decrease in liability creditor becomes partner or
contributor of business.
Decrease in capital and increase in liability When capital amount
transferred to loan.
Decrease in liability, increase in capital and decrease in assets Discharge
of liability at discount.
Decrease in asset, increase in another asset followed by decrease capital
Amount received from debtor after allowing some discount.
Example-1
Prepare accounting equation and also prepare balance sheet.
Particulars
Amount
Started business with capital
10,000
Purchased goods for credit Rs2,000 and for cash
3,000
Sold goods cost price Rs5,000 for
6,000
Rent paid
Commission received
100
500
Bank loan taken
2,000
Paid to the creditors in full settlement of account
1,900
Example-2
Prepare accounting equation and balance sheet
Particulars
Amount
Commenced business with goods Rs6,000 and for cash
14,000
Purchased goods on credit from Mr.X
2,000
Goods withdrawn for private use
500
Interest on capital due
300
Cash withdrawn from bank for private use
500
Example -3
Prepare accounting equation and balance sheet
Particulars
Amount
Commenced business with bank balance
25,000
Purchased furniture
1,000
Purchased goods for Rs3,000 and on credit
7,000
Sold goods to Y cost price Rs3,000 for
4,000
Rent received
1,000
SUGGESTED ANSWERS FOR ASSIGNMENT OF
ACCOUNTING EQUATIONS
It is important before starting the problem that the number of accounts

Involved in the given transaction in the question. This will help you to
Open name of accounts to be opened.
1. Accounting equation of.. as on .

Transactions
cash
Started
business with
capital
10,000
goods
liability
10,000
(-)3,000
5,000
2,000
New equation
7,000
5,000
2,000
Sold goods
6,000
(-) 5,000
Purchased
goods
capital
10,000
1,000
New equation
13,000
Nil
2,000
(-) 1,000
Rent paid
Commission
received
Bank
taken
(-)1,000
12,000
New equation
Nil
2,000
500
10,000
500
12,500
Nil
2,000
2,000
loan
11,000
10,500
2,000
14,500
Nil
4,000
10,500
(-)2,000
100
2,000
10,600
New equation
Paid
creditors
to
(-) 1,900
12,600
Nil
New equation
Balance Sheet as on
Liabilities and capital
Amount
Assets
Amount
Capital
10,600
Cash
12,600
Creditors
2,000
12,600
12,600
2. Accounting equation of ..as on..

Transactions
Goods
Cash
Commenced
business
6,000
14,000
Purchased
goods
on
credit
2,000
New equation
8,000
Goods drawn
for
private
use
(-)500
New equation
7,500
Cash
withdrawn for
private use
New equation
7,500
20,000
14,000
2,000
20,000
(-)500
14,000
14,000
2,000
19,500
300
(-)300
2,300
19,200
(-) 500
7,500
Capital
2,000
Int.on capital
New equation
Liability
13,500
(-) 500
2,300
18,700
Balance Sheet as on
Liability and capital
Amount
Assets
Amount
Capital
18,700
Goods
7,500
Creditors
2,000
Interest due
Cash
13,500
300
21,000
21,000
3. Accounting equation of .. as on
Transactio
n
Bank
Commenc
ed
business
25,000
Furniture
purchase
d
New
equation
1,000
24,000
1,000
(-)3,000
New
equation
21,000
1,000
to
21,000
Goods
Debtor(Y)
Liability
Capital
25,000
(-)1,000
Purchase
d goods
Sold
goods
Y
FF
1,000
25,000
10,000
7,000
10,000
7,000
(-)3,000
4,000
7,000
4,000
25,000
1,000
7,000
26,000
New
equation
Rent
received
New
equation
1,000
1,000
22,000
1,000
7,000
4,000
7,000
27,000
Balance Sheet as on .
Liabilities and capital
Amount
Assets
Amount
Capital
27,000
Bank
22,000
Creditor for goods
7,000
Furniture
1,000
Goods
7,000
Debtors (Y)
4,000
34,000
34,000
Accounting:
It is process of recording the financial transactions in a systematic manner, with
the help of accepted and recognized principles laid down for this purpose; for
arranging,analyzing,summarizing,Classifying,Interpreting,and
providing
the
information to the interested parties.
Parties interested in accounting information:
Internal users
External users
Owners / Share holders
Creditors
Management
Government
Employees
Consumers
General public
Other parties
Basis of Accounting System:

1. Cash or receipt basis: It is the method of recording under which revenues,
costs, assets and liabilities are reflected in accounts in the period in which actual
receipts or actual payments are, made. Receipts and payments A/C in case of
clubs societes; hospitals etc. are the examples of cash basis of accounting.
2. Accrual or Mercantile basis: It is the method or recording transactions by
which revenues, costs, assets and liabilities are reflected in accounts in the
period in which they accrue. This basis includes considerations relating to
outstanding, prepaid, accrued and received in advance.
3. Mixed basis: It is the combination of both the cash as well as mercantile
basis. Incomes are recorded on cash basis and expenses are recorded on
mercantile basis.
Transaction
Any exchange of goods or services for money or moneys worth by the business
with any other business or person is called transaction. It is an economic activity
of the business that changes its financial position.
Mode of
involved
payment
Cash transaction
Credit transaction
Mode
of
involved
entity
Mode of exchange
involved
External transaction
Internal transaction
Exchange transaction
Non-exchange transaction
Determinants of cash and credit transactions:

The transactions, where the terms on
cash or on cheques, by cash or by
cheques, for cash or for cheques are
used
are
identified
as
cash
transactions.
Goods sold for cash Rs1,000

Rent paid by cash Rs 500
Salary paid by cheque Rs
2,000
Good are purchased for cash
Rs 6000
The transactions where in the terms

paid,
received,
settled,
cleared,
deposited, withdrawn etc is used are
identified as cash transactions.
Charges paid Rs200

Shilpi settled her account of
Rs1,000
Rs2,000
bank
deposited
in
the
Mr. Anirban cleared his

account or Rs500 by paying
Rs450
The transactions where in personal
names or name of a firm is mentioned
are identified as credit transactions.
Goods
sold
Rs1,000
to
Sravani
Good
returned
Sreemoti Rs5,000
from
Goods returned
Rs1,000
The transactions where both cash and

personal names are mentioned are
termed as cash transactions
to
Sivani
Goods
purchased
Suman Rs6,000
from
Goods sold to Sravani for Cash

Rs1,000
Goods purchased from Suman
for cash Rs6,000
Account:
An account is summarized record of relevant transactions relating to same
activity or particular head that has taken place during a given period. Separate
individual accounts are opened for every head of expenses, revenue, asset,
liability and capital. The accounts are maintained in ledger formats as shown
below which is discussed in chapter 5 in detail.
Dr
Dat
e
Cr
Particulars
J.F
Amount
Dat
e
Particulars
J.F
Amount
Total brought forward and carried forward or casting:

When the page of journal /ledger is filled up, the total of that page is to be
carried forward (CF) to the next page. It is written as carry forward (CF) on the
same page brought forward (B/F) on the next page. At the end of the question,
the grand total of both the sides are also made. The process of brought forward
(B/F) of totals of each page and making grand total of the amount columns of the
journal is called Casting.
Assignment: Accounting Equation

Prepare Accounting equation and Balance Sheet to the following.
1.
Particulars
Amount
Mohan commenced business with cash
50,000
Purchased goods for cash
30,000
Purchased goods on credit
20,000
Sold goods(cost Rs10,000) for
12,000
Bought furniture on credit
2,000
Paid cash to a creditor
15,000
Answer:
Cash
Goods
Furniture
Capital
Liabilities
17,000
40,000
2,000
52,000
7,000
Balance sheet total Rs59,000

2.
Particulars
Amount
Ram started business with
25,000
10,000
Sold goods to Ravi on credit costing Rs1,500 for
1,800
Answer:
Cash
Goods
Debtors
Capital
Liabilities
25,000
8,500
1,800
25,300
10,000

3.
Particulars
Amount
Raj started business with cash
1,00,000
Purchased furniture for cash
12,500
Purchased goods on credit from Manish worth
27,500
Sold goods to Rupak on credit if costing Rs20,000 for
25,000
Paid rent
1,500
Depreciation to be charged on furniture
1,250
Withdrew cash for personal use
6,000
Answer:
Cash
Furniture
Debtors
Goods
Capital
Liabilities
80,000
11,250
25,000
7,500
96,250
27,500
Balance sheet total- Rs1,23,750

4.
X started business with cash Rs10,000
Purchased furniture for cash Rs1,000
Paid Rent Rs 100
Purchased goods on credit Rs3,000
Sold goods (cost price Rs2,000) for cash Rs5,000
Answer:
Cash
Furniture
Goods
Capital
Liabilities
13,900
1,000
1,000
12,900
3,000
Balance sheet total- Rs15,900

5.
Commenced business with cash Rs30,000

Rent paid in advance Rs500
Purchased goods for cash Rs15,000 and for credit Rs10,000
Sold goods for cash Rs15,000 , costing Rs10,000
Paid salary Rs500 and salary outstanding Rs100
Bought Hero Honda for personal use Rs5000
Answer:
Cash
Pre-paid
rent
Goods
Capital
Liabilities
24,000
500
15,000
29,400
10,100

6.
Invested Rs15,000 in cash in business
Purchased investment Rs7,000
Purchased a residence for personal use paying cash Rs4,000 and loan
Rs10,000
Sold investment costing Rs1,000 for Rs1,400
Purchased an old scooter for Rs2,800 cash. For personal use
Received salary Rs 3,600
Paid cash Rs500 for loan andRs300 for interest
Drawings Rs300
Received dividend Rs200
Answer:
Cash
Investment
Capital
Liabilities
5,300
6,000
1,800
9,500

7.
Commenced business with cash Rs50,000
Purchase good for cash Rs20,000 and credit Rs30,000
Sold goods for cash Rs30,000 costing Rs25,000
Insurance paid Rs500
General expenses outstanding Rs100
Bought furniture Rs4,000 on credit
Bought T.V for personal use Rs 5,000

Purchased building for cash Rs20,000
Interest received Rs300
Answer:
Cash
Goods
Furniture
Building
Capital
Liabilities
34,800
25,000
4,000
20,000
49,700
34,100

8.
Started business with cash Rs50,000
Purchased goods for cash Rs5,000 and Rs20,000 on credit from Jitu
Sold goods for cash Rs25,000(cost price Rs15,000)
Paid rent in advance Rs1,000 and other expenses Rs1,500
Purchased scooter for personal use Rs5,000
Paid to Jitu Rs10,000
Answer:
Cash
Goods
Prepaid
rent
Capital
Liabilities
52,500
10,000
1,000
53,500
10,000

9
Ram commenced business with Rs35,000
Withdrew for private use Rs850
Purchased goods for cash Rs5,000
Paid wages Rs150
Paid for creditors Rs5,000
Sold goods on credit for Rs7,500
Sold goods for cash Rs2,000 (cost price Rs1,500)
Answer:
Cash
Goods
Debtors
Capital
Liabilities
26,000
3,000
7,500
34,500
2,000
10.
Started business with Cash Rs9,000
Paid rent in advance Rs200
Purchased goods for cash Rs2,500 and on credit Rs1,000
Sold goods for cash Rs2,000 (costing Rs1,200)
Rent paid Rs500 and rent outstanding Rs100
Bought motor cycle for personal use Rs4,000
Purchased equipment for cash Rs250
Paid to creditors Rs300
Depreciation on equipments Rs25
Business expenses Rs200
Answer:
Cash
Goods
Advance
rent
Equipmen
ts
Capital
Liabilities
3,050
2,300
200
225
4,975
800

11.
Rajesh started business with cash Rs9,000
Purchased equipments for cash Rs7,400
Paid Rs300 to creditors
Sold goods for cash Rs1,500 ,cost price Rs1,200
Business expenses Rs700
Goods worth Rs400 taken for personal use
Depreciation on equipments Rs200
Rent outstanding Rs200
Answer:
Cash
Goods
Equipments
Capital
Liabilities
1,100
2,050
7,200
7,800
2,550

12.
Particulars
Amount
Dr .Dhoni commenced business with
70,000
14,000
Withdrew for private use
1,700
10,000
Paid wages
300
Paid to creditors
10,000
Sold goods on credit
15,000
Sold goods for cash (cost price Rs3,000)
4,000
Purchased furniture
500
Answer:
Cash
Goods
Debtors
Furniture
Capital
Liabilities
51,500
6,000
15,000
500
69,000
4,000

13.
Particulars
Amount
Started business with cash
15,000
7,000
Purchased furniture for cash
500
Deposited in to bank
2,000
Sold goods to S on credit costing Rs4,000 for
6,000
Withdrawn for private use
200
Paid for salaries
300
Answer:
Cash
Goods
Furnitur
e
Bank
Debtors
Capital
Liabiliti
es
12,000
3,000
500
2,000
6,000
16,500
7,000

14.
Particulars
Amount
Started business with cash
50,000
4,000
1,000
Furniture purchased
500
Withdrew for private use
700
Paid rent
200
Received interest
100
Sold goods on credit, costing Rs500 for
700
Paid to creditors
400
Paid salaries
200
Answer:
Cash
Goods
Furniture
Debtors
Capital
Liabilities
47,100
4,500
500
700
49,200
3,600

15.
Sl
Transactions
Accounts involved
Started business with capital of Rs10,000
Cash(A) and capital
Purchased goods for cash Rs3,000 and on

credit Rs2,000
Cash (A,
creditor(L)
goods(A)
and
Sold goods
Rs4,000
Cash (A), goods(A)

profit(Capital)
and
Rent paid Rs1,000
Cash (A),Rent(Capital)
Commission received Rs500
Cash(A),Comm.(Capital)
bank loan taken Rs2,000
Cash (A) ,Bank loan(L)
for
cash
Rs6,000
costing
Answer:
Cash
Goods
Capital
Liabilities
14,500
1,000
11,500
4,000

16.
Sl
Transactions
Accounts involved
Commenced business with goods Rs6,000

and cash Rs14,000
Cash(A),Goods(A),Capital
Purchased goods on credit from X for

Rs2,000
Goods(A), X(L)
Goods withdrawn for private use Rs500
Goods(A),Drawings(Cap)
Interest on capital due Rs300
Int(Cap), liabilities
Cash deposited in to bank Rs1,000
Cash (A),Bank(A)
Cash withdrawn from bank for private use

Rs500
Bank(A),Drawings(Cap)
Answer:
Cash
Goods
Bank
Capital
Liabilities
13,000
7,500
500
18,700
2,300

17.
Sl
Transactions
Accounts involved
Commenced business with bank balance

Rs15,000 and cash Rs10,000
Capital, Bank (A), Cash

(A)
Purchased furniture for Rs1,000
Furniture(A), Cash(A)
Purchased goods for Rs3,000 and on credit

for Rs7,000
Cash(A),Goods(A),Cred
itors
(L)
Sold goods
Rs3,000
to
for
Rs4,000,costing
Y
(A),Goods(A),Profit(Ca
p)
Rent received Rs1,000
Rent(Capital) ,Cash (A)
Salary Paid Rs600
Salary
,Cash(A)
(Capital)
Answer:
Goods
Cash
Bank
Furnitur
e
Debtors
(Y)
Capital
Liabiliti
es
7,000
6,400
15,000
1,000
4,000
26,400
7,000

18.
Started business with Rs40,000
Purchased goods worth Rs10,000
Purchased goods from Laxmi for cash Rs2,000
Purchased good from Bijaya laxmi Rs1,000 and for cash Rs500
Purchased good from Ambika Rs800
Sold goods cost price Rs5,000 for Rs7,000

Sold goods to Manoj Rs4,000, cost price Rs2,500
Sold goods goods for cash to Rabindra cost price Rs6,000 for Rs5,000
Answer:
Debtor
Cash
Goods
Capital
Liabilities
4,000
34,500
5,800
42,500
1,800

19. Commenced business with Rs30,000
Rent paid Rs500
Rent received Rs700
Rent receivable Rs250
Rent due/arrear/payable/ outstanding /to be paid Rs400
Rent paid in advance Rs600
Rent received in advance Rs200
Rent paid on behalf of Anupama Rs300
Rent received on behalf of Indrani Rs600
Rent paid Rs100 and rent outstanding Rs200
Rent paid Rs400 and rent prepaid Rs500
Answer:
Cash
Rent
receivabl
e
Prepaid
rent
Debtors
Capital
Liabilities
29,100
250
1,100
300
29,350
1,400

20.
Commenced business with Rs20,000
Purchased goods for Rs10,000
Goods withdrawn for private use Rs1,000
Cash withdrawn for private use Rs500
Goods given as sample/advertisement Rs500
Goods given as charity/donation Rs300
Goods lost by fire Rs200
Goods lost by fire Rs1,000 and insurance claim received Rs500
Goods lost by fire Rs2,000 and insurance claim admitted Rs1,200

Answer:
Cash
Goods
claim
Capital
Liabilities
10,000
5,000
1,200
16,200

21.
Started business with Rs 15,000
Purchased furniture Rs5,000
Depreciation on furniture Rs300
Repairs to furniture Rs50
Furniture cost price Rs200 sold for 250
Furniture cost price Rs100 sold for Rs75
Furniture taken for personal use Rs500
Answer:
Cash
Furniture
Capital
Liabilities
10,275
3,900
14,175

Important tips:
Whether expenses paid or outstanding in both the cases the

amount will be reduced from capital. And also if paid the amount
will reduced from cash and if outstanding it will increase the
liability side.
If income received in advance it will increase the liability and
increase the cash
If any expense paid in advance then a separate prepaid expenses
column will be opened and amount will be shown in the prepaid
expenses and will reduce the cash column in the asset side.
Rent receivable is an asset a separate column will be opened in
assets and added to capital as accrued income

Accounting Equation

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Accounting Equation

Capital: It the amount contributed by the proprietor to start a business. It is the

Example to various situations

Decrease in asset and decrease in owners capital - Cash withdrawn for

Started business with capital

Purchased goods for credit Rs2,000 and for cash

Sold goods cost price Rs5,000 for

Bank loan taken

Paid to the creditors in full settlement of account

Commenced business with goods Rs6,000 and for cash

Purchased goods on credit from Mr.X

Goods withdrawn for private use

Interest on capital due

Cash withdrawn from bank for private use

Commenced business with bank balance

Purchased goods for Rs3,000 and on credit

Sold goods to Y cost price Rs3,000 for

SUGGESTED ANSWERS FOR ASSIGNMENT OF

It is important before starting the problem that the number of accounts

1. Accounting equation of.. as on .

2. Accounting equation of ..as on..

Creditor for goods

Owners / Share holders

Basis of Accounting System:

Determinants of cash and credit transactions:

Goods sold for cash Rs1,000

The transactions where in the terms

Charges paid Rs200

Mr. Anirban cleared his

The transactions where both cash and

Goods sold to Sravani for Cash

Total brought forward and carried forward or casting:

Assignment: Accounting Equation

Mohan commenced business with cash

Purchased goods for cash

Purchased goods on credit

Sold goods(cost Rs10,000) for

Bought furniture on credit

Paid cash to a creditor

Balance sheet total Rs59,000

Ram started business with

Purchased goods on credit

Sold goods to Ravi on credit costing Rs1,500 for

Balance sheet total Rs35,300

Raj started business with cash

Purchased furniture for cash

Purchased goods on credit from Manish worth

Sold goods to Rupak on credit if costing Rs20,000 for

Depreciation to be charged on furniture

Withdrew cash for personal use

Balance sheet total- Rs1,23,750

Balance sheet total- Rs15,900

Commenced business with cash Rs30,000

Balance sheet total- Rs39,500

Balance sheet total- Rs11,300

Bought T.V for personal use Rs 5,000

Balance sheet total Rs83,800

Balance sheet total- Rs63,500

Balance sheet total Rs36,500

Balance sheet total- Rs5,775

Balance sheet total- Rs10,350

Dr .Dhoni commenced business with

Purchased goods on credit

Withdrew for private use