Understanding the Accounting Equation Through an Illustration No 2
Here is the illustration or Example of Accounting Equation from the book of principles of accounting i.com part 1 or b.com part, chapter 2
for understanding the accounting equation through an illustration 2.
Solve the following transactions in accounting equation
2014
June 1. Mr. Salman started his business
with cash Rs.10,00,000
5. Purchased Furniture for cash Rs.4,000
6. Purchased Goods for Cash Rs.25,000
10. Paid Transportation on goods purchased Rs.1,000
12. Sold Goods For cash Rs.15,000, costing Rs.11,000
15. Purchased Goods on credit basis for Rs.15,000
19. Sold Goods to Rashid on Credit basis for Rs.8,000, costing, Rs.
6,500
25. Received Cash from Rashid Rs.4,000
28. Cash paid to Creditor Rs.9,000
Solution:
Mr. Salman
Accounting Equation
For the Month of June, 2014
2014
|
Assets =
Cash + Furniture
+ Goods + Debtors
|
Liabilities +
Creditors
|
Owner’s Equity
Capital
|
June 1
|
+100,000 0 0 0
|
0
|
100,000
|
June 5
|
-4,000 +4,000
|
||
Balances
|
96,000 4,000 0 0
|
0
|
100,000
|
June 6
|
-25,000 +25,00
|
||
Balances
|
71,000 4,000 25,000 0
|
0
|
100,000
|
June 10
|
-1,000
|
-1,000
|
|
Balances
|
70,000 4,000 25,000 0
|
0
|
99,000
|
June 12
|
+15,000 -11,000
|
+4,000
|
|
Balances
|
85,000 4000 14,000 0
|
0
|
103,000
|
June 15
|
+15,000
|
+15,000
|
|
Balances
|
85,000 4,000 29,000 0
|
15,000
|
103,000
|
June 19
|
-6,500 +8,000
|
+1,500
|
|
Balances
|
85,000 4,000 22,500 8,000
|
15,000
|
104,500
|
June 25
|
+4,000 -4,000
|
||
Balances
|
89,000 4,000 22,500 4,000
|
15,000
|
104,500
|
June 28
|
-9,000
|
-9,000
|
|
Balances
|
80,000 4,000 22,500 4,000
|
6,000
|
104,500
|
June 30
|
-4,000
|
-4,000
|
|
Balances
|
76,000 4,000 22,500 4,000
|
6,000
|
10,500
|
Total Assets = 76,000 + 4,000 + 22,500 + 4,000 =
6,000 + 100,500
Total Assets = 106,500
= 106,500
Note: If the assets and the sum of liabilities and owner's
equity are not equal, you must understand that your question is wrong.
In order to better understanding about the Accounting Equation,
You may also interested in Accounting Equation.
Explanation:
1. On June 1, Mr. Salman started the business with cash
Rs.1,00,000. As Mr. Salman is investing the money in the business is called
capital, so there are two accounts involved in this transaction. First one is
Cash and second one is Capital. Cash is increased, so it is added and Capital
is also increased, so it is added to Capital.
2. On June 5, Purchasing of furniture increased the assets in
the business by Rs.4,000 and decrease the Cash because cash is paid to purchase
the furniture.
3. On June 6, Goods are purchased for Cash Rs.25,000 and for
resale purpose, so we record it as goods. The amount of Cash is decreased as it
is paid to purchase goods.
4. On June 10, the transportation is paid as an expense for
Rs.1,000 for Cash. As all the expenses of the business are borne by the owner
and these expenses are increased so the transportation expense is deducted from
the capital. Cash is paid for the expense, so it is also decreased.
Note: Transportation expense is added to the cost of goods
purchased because it is part of cost of the goods purchases.
5. On June 12, Goods costing Rs.11,000 are sold for Rs.15,000
lead to a profit of Rs.4,000 (15,000 - 11,000). Profit is the result of
contributions made by owner, so it is added to profit.
Goods costing Rs.11,000 are deducted from the Goods as goods are
selling. Cash is increased for Rs.15,000 because we receive it.
Note: Profit = Revenues - Expenses
6. On June 15, Goods Rs.15,000 are purchased on credit generate
our creditors. Goods are increased so it is added to goods. Creditors are
created and increased in the business.
7. On June 19, Again Goods costing Rs.6,500 are sold on credit
to Debtor (Rashid) Rs.8,000 generate a profit of Rs.1,500 (8,000 - 6,500).
Profit is added to Capital Account. As now goods are sold on credit, so our
debtor (Rashid) is created and instead of adding Rs.8,000 to Cash, we now
generate our debtor account and adds this amount in this account. Goods costing
Rs.6,500 are deducted from the cost of goods.
8. Cash is received from our Debtor (Rashid to which we sold
goods) for Rs.4,000. So, Cash of Rs 8,000 is added to Cash account as it is
received from our customer. Our debtor is decreased as he is making
payments to us for the goods sold to him. So Rs.4000 is deducted from the
debtor account.
9. Cash paid to our creditor from which we purchased the goods.
As the cash is paid, so the cash is decreased from our business for Rs.9,000
and also our liability (Creditor Account) is decreased because now we are
making payments to them, so now we have to pay less amount as compared to
previous payments. Rs.9,000 are deducted from the creditor account.
10. Paid rent and salaries for Rs.4,000 generate our expenses
for the business. So expenses are borne by the owner, so it is deducted from
the capital account. Cash is also paid out for meeting these expenses.
Cash is decreased by Rs.4,000 and it is deducted from the amount
of Cash Account.
I hope now you will understand the accounting equation through the
above mentioned illustration no. 2.
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