ACCOUNTING EQUATION

Learning outcome

• Sketch the accounting impact of a transaction under

accrual accounting system
 Equation
• The word equation comes from the word equal. For any
equation, one side always equals another.
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources
owned or
controlled by a
business
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the

creditors, which
represent debts of
the business
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the

owners
The Accounting Equation could also
apply to a personal situation.
Suppose you buy a car for Rs.5,000,
borrow Rs.4,000 from the bank, and
pay the rest yourself. Here’s the
result:

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 Accounting Equation

Assets = Liabilities + Equity

$5,000 = $4,000 + $1,000

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 The accounting equation

ASSETS = EQUITY + LIABILITIES

• The accounting equation indicates how
much of the assets of a business
belong to, or are owned, by whom.
The Accounting Equation worksheet

1. The basic accounting equation is assets =

liabilities + ______________ ______________.
 Identifying changes in the accounting equation

For each of the transactions in items 2 through 9, indicate the two (or
more) effects on the accounting equation of the business or company.

#2

The owner invests personal cash in the business.

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#3

The owner withdraws business assets for personal use.

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#4

The company receives cash from a bank loan.

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#5

The company repays the bank that had lent money to the company.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#6

The company purchases equipment with its cash.

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#7

The owner contributes her personal truck to the business

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#8

The company purchases a significant amount of equipment on credit.

Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 Identifying changes in the accounting equation

#9

The company purchases land by paying half in cash and signing a note payable
for the other half.
Assets: Increase Decrease No Effect
Liabilities: Increase Decrease No Effect
Owner's (or
Stockholders') Increase Decrease No Effect
Equity:
 PROOF: A = OE + OL
Owners of S. Company contributed
20,000 cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) Owner’s Equity (equity)

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 Transaction Analysis
Owners of S. Company contributed
20,000 cash to start the business.

20
 Transaction Analysis
Purchased goods by paying 1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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 Transaction Analysis
Purchased goods by paying 1,000
cash.

22
 Transaction Analysis
Purchased equipment for 15,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

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 Transaction Analysis
Purchased equipment for 15,000 cash.

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 Transaction Analysis
Purchased goods of 200 and
Equipment of 1,000 on account.

The accounts involved are:

(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

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 Transaction Analysis
Purchased Goods of 200 and
Equipment of 1,000 on account.

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 Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation
is still in balance.

Now let’s look at transactions involving revenues

and expenses. 27
 Transaction Analysis
Rendered consulting services
receiving 3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

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 Transaction Analysis
Rendered consulting services
receiving 3,000 cash.

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 Transaction Analysis
Paid salaries to employees, £800
cash.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

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 Transaction Analysis
Paid salaries to employees, £800
cash.

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 Transaction Analysis
Borrowed Rs.4,000 from SBI

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

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 Transaction Analysis
Borrowed Rs.4,000 from SBI

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Sometimes we expand the Accounting
Equation to show all the Equity
components. This is called the
EXPANDED ACCOUNTING EQUATION.

This equation must

ALWAYS BE IN
BALANCE 34
 Transactions Covered

Discount paid/ Received

Accrued Income/expenses
Outstanding expenses
Prepaid expenses/Paid in advance
Advances received
Show that the accounting equation is satisfied
after taking into consideration each of the
following transactions in the books of Mr.
Anukalp for the period 2019-2020:-
Anukalp commenced business
with cash Rs. 3,00,000.
Anukalp Sold goods (Cost Rs. 10,000)
at Rs. 20,000 on credit to Sohan.

Sohan paid for the sale worth Rs. 15000

Anukalp sold goods (Cost Rs.
20,000) at Rs. 15,000 with
cash.
Anukalp has to pay rent to
landlord Rs. 10,000 but not
yet paid.
 Anukalp has to receive
commission of Rs. 2,000 but
not yet received.
Anukalp has paid advance
insurance of Rs. 14,000
before due date.
Anukalp purchased Computer
of Rs. 50,000 on credit from
Mr.Vividh

Vividh Account was settled

with Rs. 45,000
Received interest in advance
Rs. 10,000.
Wages outstanding Rs. 800
 The furniture costing Rs.
20,000 was sold out for Rs.
31000
Ques: Prepare accounting equation from the following transactions:

S.no Particulars Amount(Rs.)

1. Started Business with cash 20,00,000
2. Purchased Machinery 5,00,000
3 Goods sold for cash costing Rs.35,000 40,000
4 Withdrawn cash for personal use 20,000
5 Goods distributed as charity 10,000
6 Salaries paid 4,000
7 Wages paid 3,000
8 Commission received 6,000
9 Machinery sold(cost=40,000) 30,000
Ques: Prepare accounting equation from the following transactions:
1. Commenced Business with cash Rs.50,00,000
2. Deposited cash into Bank Rs.10,00,000
3. Purchased Plant Rs.5,00,000
4. Rent paid Rs.10,000
5. Purchased goods on cash Rs.5,000
6. Sold goods for cash Rs.6,000
7. Interest Received Rs.4,000
8. Purchased goods from Anil Rs.10,000

9. Sold goods to Raja Rs. 5000

10. Withdrawn cash for personal use Rs. 2000

 Show that the accounting equation is satisfied after taking into
consideration each of the following transactions in the books of
Mr. Mohan and Co.:-

•Mohan commenced business with cash Rs. 3,00,000.

•Mohan Purchased furniture for cash Rs. 10000.
•Mohan Purchased Goods from Shyam on credit of Rs. 50,000.
•Mohan Sold goods (Cost Rs. 10,000) at Rs. 20,000 on credit to Sohan.
•Mohan sold goods (Cost Rs. 20,000) at Rs. 15,000 with cash.
•Mohan has to pay rent to landlord Rs. 10,000 but not yet paid.
•Mohan has to receive rent of Rs. 2,000 but not yet received.
• Mohan has received in advance the commission income of Rs. 14,000.
•Mohan purchased Computer of Rs. 5,000 with business cash for
personal use.
 Show that the accounting equation is satisfied after taking into
consideration each of the following transactions in the books of
Satya co:-

•Commenced business with cash Rs. 10,00,000

•Sold goods for Rs. 1,50,000 on credit to Mr. A costing Rs.
1,20,000
•Received cash from Mr. A Rs.1,45,000 in full settlement
•Purchased Building for Rs. 4,90,000 on credit from Deepak
Ltd.
•Deepak’ Account was settled with Rs. 4,00,000
•Satya co. received their consultancy income in advance
worth Rs. 40,000
•Satya co. paid in advance for their stationery expenses
worth Rs.5000
 Prepare an accounting equation for the following transactions
for Swayam co.:
(i) Started business with cash Rs.18,000
(ii) Paid rent in advance Rs.400
(iii) Purchased goods for cash Rs.5,000 and on credit from Mr.
Sunny Rs.2,000
(iv) Sunny’ account was settled in full for Rs. 1000
(v) Sold goods for cash Rs.4,000 (costing Rs.2,400)
(v) Salaries due but not yet paid to the staff Rs.1,000
(vi) Bought second hand motor cycle for personal use
Rs.7,600
(vii) Sale of equipment to Mr. Jai for Rs.50,000 and account
was settled with rs. 45,000
(viii) Rs. 2,80,000 deposited into Axis Bank.
(ix) Rent was received in advance Rs. 40,000
(x) Amount for Consultancy services earned but not collected
worth Rs. 12000
Show that the accounting equation is satisfied after taking
into consideration each of the following transactions in the
books of Mr. N
• Started business with capital 1,00,000
• Bought furniture 25,000
• Bought goods for cash 20,000
• Bought goods from Ram on Credit 5,000
• Sold goods for cash for 15,000
• Sold goods to Shyam on credit 8,000
• Paid cash to Ram 4,000
• Received cash from Shyam 5,000
• Paid Cash into Bank 25,000
• Withdrawn from bank 10,000
Following are the accounting transactions relating to Mr. P's business.
Use the accounting equation to show their effect on his assets,
liabilities and capital.
• Commenced business with a Capital of 50,000
• Bought Machinery for cash 10,000
• Purchased goods for cash 15,000
• Purchased goods from A on credit 5,000
• Sold goods for cash 10,000
• Paid to A 2,000
• Sold goods to B on credit 3,000
• Paid into Bank 6,000
• Paid to A by cheque 1,000
• Received from B a cheque for 2,000
1. Which of the following statements is
incorrect?
(a) Liabilities + Assets = Capital
(b) Assets – Liabilities = Capital
(c) Liabilities + Capital = Assets
(d) Assets - Capital = Liabilities
2. On January 1st, 2009 an entity's balance
sheet showed total assets of Rs. 750 and
liabilities of Rs. 250. Owners' equity at
January 1st was?
(a) Rs. 750
(b) Rs. 1,000
(c) Rs. 500
(d) Rs. 250
3) If assets are Rs. 8000 and capital is Rs.
6000, liabilities will be
(A) 8000
(B) 2000
(C) 14,000
(D) None of these
4) The accounting equation represents
(A) Resources are allocated at cost price
(B) Owner’s give money for business
(C) Resources in the business are equal to
the source of business
(D) Resources in the business are not
equal to the source of business
 THANK YOU

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