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Accounting Equation

The accounting equation is a fundamental concept in accounting that the total assets of a business must equal the total claims on those assets. The accounting equation is expressed as Assets = Liabilities + Owner's Equity. The document provides examples and explanations of the accounting equation, including different presentations of the equation, the four effects of transactions, and the expanded accounting equation. It also provides practice problems applying the accounting equation to record business transactions and ensure the equation remains balanced.

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Zainab Asif
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52 views8 pages

Accounting Equation

The accounting equation is a fundamental concept in accounting that the total assets of a business must equal the total claims on those assets. The accounting equation is expressed as Assets = Liabilities + Owner's Equity. The document provides examples and explanations of the accounting equation, including different presentations of the equation, the four effects of transactions, and the expanded accounting equation. It also provides practice problems applying the accounting equation to record business transactions and ensure the equation remains balanced.

Uploaded by

Zainab Asif
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting Equation

Accounting Equation is also called Balance Sheet Equation. It is a basic concept of


agreement between left-hand and right-hand site and starting point of double entry. Double
Entry Accounting states that for every debit entry there should be pass a credit entry. Every
transaction has twofold effect; this concept has a result of accounting equation or fundamental
equation. At any point of time total Assets must be equal to equities. In other words we can say
that left hand side which is resource side must be equal to right hand side which is of course
source side.
Asset = Liabilities + Owner Equity
Or
Assets = Equities / Claims
Or
Resources = Sources
Or
Left hand side = Right hand side

Different Presentation of Accounting Equation


There are different style of presentation mention below for balance sheet equation:
>> Practice Questions with the help of Accounting Equation Format.

Four Effects of Transactions


Accounting Transaction is broadly classified into four categories:

Expanded Accounting Equation

The Expanded Accounting Equation of sole proprietorship and partnership is Accounting


Equation (Assets = Liabilities + Owner’s Equity) – Expenses + Revenue – Drawings
Account.
In case of company business the expanded accounting equation in the balance sheet
equation (Assets = Liabilities + Stockholders’ Equity) with replacement of
Stockholders’ Equity with Paid-in Capital – Expenses + Revenues – Treasury Stock
– Dividends.
> > Practice Accounting Equation Problems and Solutions.
Example # 1:
For each of the following transactions indicate the effects i.e. (Increase, Decrease, Conversion or
No Effect)?

Example # 2:
From the list of accounts below, determine which assets are and which equities are. List the
assets under the Asset Column and the equities under the equities Column. Then add each
column and complete the Fundamental Accounting Equation?

Accounts Asset Equities

Cash Rs. 5,000 Rs. 5,000

Accounts Receivable 10, 600 10,600


Building 35,000 35,000

Accounts Payable 5,000 5,000

Inventory 200 200

Computer Equipment 18,000 18,000

Bank Loan 6,000 6,000

Mortgage Payable 10,000 10,000

Owner Equity 47,800 47,800

TOTAL Rs. 137,600 Rs. 68,800 Rs. 68,800

Example # 3:
For each of the following equations, a figure is missing. In the space provided, please supply the
missing figure that will balance the equation.

Assets Liabilities Owner’s Equity

100 20.00 80

790 720 70

2,000 400 1,600

11,218 10,000 1,218

1,010 25 985

340 12 328

8793 0 8793

2,000 1,501 499

Accounting equation Problems:

Problem 1:
Habib Ullah Sadiq is wholesale trader; following transactions are record in Accounting
Equation?

i. Commence business with cash Rs. 200,000 and Land Rs. 50,000.

ii. Bought merchandising for cash Rs. 80,000.

iii. Cash sales of worth Rs. 25,000.

iv. Bought goods on credit from Salman of worth Rs. 50,000.

v. Sales on account to Ali Raza Rs. 12,000.

vi. Purchase furniture of the value of Rs. 5,000 by cash.

vii. Received cash form Ali Raza of Rs. 10,000.

viii. Return defective furniture of worth Rs. 1,500.

xi. Paid wages Rs. 1,000, Rent 2,000 and Electricity Bill Payable Rs. 1,500.
Problem 2:
Muhammad Faizan Abid had the following transactions. Use accounting equation to show their effect on
his Assets, Liabilities and Capital?
a) Invested Rs. 15,000 in cash.
b) Purchased securities for cash Rs. 7,500.
c) Purchased a home for Rs. 15,000: giving Rs. 5,000 in cash and the balance through loan account.
d) Sold securities costing Rs. 1,000 for Rs. 1,500.
e) Purchase an old car for Rs. 2,800 cash.
f) Received cash as salary Rs. 3,600.
g) Paid cash Rs.500 for loan and Rs. 300 for interest.
h) Paid cash for expenses Rs. 300.
i) Received cash for dividend on securities Rs.200.
Problem 3:
Selected Transactions from Shah Transport Services began on June 1, 2016 by Zahid Shah as?
a. Zahid Shah invested Rs. 600,000.
b. Truck was Purchase by business for Rs. 430,000.
c. Equipment purchased on credit for Rs. 9,000.
d. A bill of Rs. 7,200 for transporting goods was sent to Mr. Ashraf Abbasi, a customer.
e. Cash of Rs. 6,000 is received from the customer who was billed in d.
f. Received Rs. 22,300 is cash for transporting goods.
g. A payment of Rs. 5,000 was made on the equipment purchased in c.
h. Paid expenses of different types for Rs. 1,700 in cash.
i. Equipment of Rs. 1,200 was withdrawn from business for Zahid Shah’s personal use.
Required: Arrange the Assets, Liabilities and Owner’s Equity accounts in an Accounting Equation, using
the following account titles: Cash, Trucks, Equipment, Account Receivables, Account Payable and
Owner’s Equity:
Problems to be solved by the students:

Problem 4:
Prove that the Accounting Equation is satisfied in all following transactions of Wajeeha Ejaz owner of
business enterprises?
I. Started business with cash value of Rs. 500,000.
II. Rent paid in advance for a year Rs. 6,000.
III. Purchased merchandising inventory for cash Rs. 80,000 and on account Rs. 20,000 from Mr. Tahir.
IV. Purchased Marketable securities for cash Rs. 100,000.
V. Cash Sales Rs. 30,000 (cost 20,000).
VI. During the period rent expires Rs. 2,000.
VII. Commission paid during the trading was Rs. 1,000.
VIII. Received cash dividend Rs. 4,000 on marketable securities.
IX. Paid to Rs. 19,500 to Mr. Tahir in full settlement.
X. Withdrew inventory for domestic purpose by owner of worth Rs. 6,000

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