Class - 7

Accounting Equation/ Balance Sheet Equation

. The financial position of a company is measured by the following items:

1. Assets (what it owns)

2. Liabilities (what it owes to others)
3. Capital/Owner's Equity (the difference between assets and liabilities)
Total Assets = Total Liabilities
Total Assets= Capital + Other Liabilities

 Assets are a company's resources—things the company owns.

Examples of assets include cash, accounts receivable, inventory, prepaid insurance,
investments, land, buildings, equipment, and goodwill. From the accounting equation, we
see that the amount of assets must equal the combined amount of liabilities plus owner's (or
stockholders') equity.

 Liabilities are a company's obligations—amounts the company owes.

Examples of liabilities include notes or loans payable, accounts payable, salaries and wages
payable, interest payable, and income taxes payable (if the company is a regular
corporation).

 Liabilities can be viewed in two ways:

(1) As claims by creditors against the company's assets, and
(2) As sources (along with owner's or stockholders' equity) of the company's assets.

Owner's equity or stockholders' equity is the amount remaining after liabilities are deducted
from assets:
Assets - Liabilities = Owner's (or Stockholders') Equity.

 Owner's or stockholders' equity also reports the amounts invested into the company by the
owners plus the cumulative net income of the company that has not been withdrawn or
distributed to the owners.
 If a company keeps accurate records using the double-entry system, the accounting
equation will always be "in balance," meaning the left side of the equation will be equal to
the right side.
 The balance is maintained because every business transaction affects at least two of a
company's accounts.
 For example, when a company borrows money from a bank, the company's assets will
increase and its liabilities will increase by the same amount.
 When a company purchases inventory for cash, one asset will increase and one asset will
decrease.
 There are two or more accounts affected by every transaction, the accounting system is
referred to as the double-entry accounting system or book-keeping system.
Balance Sheet and Income Statement
 The balance sheet is also known as the statement of financial position and it reflects the
accounting equation.
 The balance sheet reports a company's assets, liabilities, and owner's (or stockholders')
equity at a specific point in time.
 Like the accounting equation, it shows that a company's total amount of assets equals the
total amount of liabilities plus owner's (or stockholders') equity.
 The income statement is the financial statement that reports a company's revenues and
expenses and the resulting net income.
 While the balance sheet is concerned with one point in time, the income statement covers a
time interval or period of time.
 The income statement will explain part of the change in the owner's or stockholders' equity
during the time interval between two balance sheets.

CLASSIFY THE FOLLOWING INTO ASSETS AND LIABILITIES

1. Cash in hand 17. Salary payable
2. Bank overdraft 18. Sundry creditors
3. Income tax payable 19. Prepaid Insurance
4. salary 20.Land
5. Rent unearned 21.Building
6. Furniture 22.Sundry debtors
7. Cash at Bank 23.Bills payable
8. Motor Vehicle 24.Plant and machinery
9. Short-term loans 25.Patents
10.Long-term loans 26.Copy rights
11.Reserves 27.Share capital
12.Bills receivable 28.Securities premium
13.Short-term investments 29.Rent paid
14.Long-term investments 30Rent payable
15.Goodwill 31.Rent paid in advance
16.Closing Stock 32.Rent received in advance

 EFFECTS OF TRANSACTION ON ASSETS, LIABILITIES AND CAPITAL

1. Capital brought in cash/kind
2. Loan taken
3. Purchase of fixed assets/goods for cash
 4. Purchase of fixed assets/goods on credit
5. Sold goods for cash at profit
6. Sold goods for credit at loss
7. Return of goods by a customer
8. Return of goods to a supplier
9. Payment received from a customer to whom cash discount was allowed
10.Payment made to a supplier and discount received
11.Salary paid
12.Salary payable
13.Rent received
14.Rent due but not received
15.Rent received in advance
16.Depreciation charged on fixed assets
17.Goods withdrawn by proprietor for personal use
18.Goods destroyed by fire
19.Bad debts incurred
20.Repayment of loan
Case-1

Prepare a Statement of Accounting Equation and Balance Sheet from the following transactions.

Date Transactions Amount (Rs.)

1.11.2020 Ravinder started business with cash 1,08,000
5.11.2020 Goods purchased on credit 18,000
6.11.2020 Goods purchased on cash 14,400
8.11.2020 Cash withdrawn from business for private use 2,160
9.11.2020 Paid salary 1,440
10.11.2020 Received commission 360
16.11.2020 Paid to creditors 12,000
18.11.2020 Goods sold on credit(Cost price Rs. 9,600) 10,800
19.11.2020 Purchased furniture for cash 9,600
30.11.2020 Salary unpaid 5,000
30.11.2020 Salary prepaid 3,000
 Accounting Equation
Date Goods Furniture Cash Debtors Salary Capital Creditors Salary
prepaid Unpaid
1.11 1,08,000 1,08,000
5.11 18,000 18,000
6.11 14,400 (14,400)
8.11 (2,160) (2,160)
9.11 (1,440) (1,440)
10.11 360 360
16.11 (12,000) (12,000)
18-11 (9,600) 10,800 1,200
19.11 9,600 (9,600)
30.11 (5,000) 5,000
30.11 (3,000) 3,000
Total 22,800 9,600 65,760 10,800 3,000 1,00,960 6,000 5,000

Balance sheet of M/S Ravinder as on 30.11 23

Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital 1,00,960 Stock 22,800
Creditors 6,000 Furniture 9,600
Salary unpaid 5,000 Cash 65,760
Debtors 10,800
Salary Prepaid 3,000
Amount (Rs.) 1,11,960 Total 1,11,960

Case-2

Mr. Prasad had the following transactions:

a) Started business with cash Rs.50,000

b) Purchased goods for cash Rs.20,000 and credit Rs.30,000
c) Sold goods for cashRs.40,000, costing Rs.30,000
d) Paid rent Rs. 500
e) Rent out standing RS.100
 f) Bought furnitureRs.5,000 on credit.
g) Bought a motor cycle for personal use Rs.5,000
h) Purchased building for cash Rs.20,000

Use accounting equation to show the effect of the above transactions on his assets, liabilities and capital
and show also his Balance Sheet.

Case-3

Prepare a statement of accounting equation and balance sheet from the following transactions.

Date Transaction Amount (Rs.)

1.11.2022 Manas started business with cash 5,08,000
5.11.2022 Goods purchased on credit from Mr.Bikash 48,000
6.11.2022 Goods purchased on cash from Mr. Jadav 14,000
8.11.2022 Goods sold to Mr. Sritam at 20% profit on cost 24,000
9.11.2022 Purchase a motor bike for business 1,440
10.11.2022 Paid salary 3,600
16.11.2022 Salary outstanding 12,000
18.11.2022 Received from Mr. Sritam on account 21,500
19.11.2022 Paid to Mr.Bikash in full settlement 47,500
20.11.2022 Goods sold on credit(Cost price Rs. 9,600) 10,500
21.11.2022 Purchased furniture for cash 20,000
24.11.2022 Goods Destroyed by fire(Cost price Rs.8,200, Sale price
25.11.2022 Rs.8,700) 2,000
27.11.2022 Insurance premium paid 1,300
29.11.2022 Insurance premium paid in advance 1,200
30.11.2022 Withdraw goods for personal use(Cost Rs.500, Sale price
Rs.600)
30.11.2022 Charge depreciation on furniture 300