RANI SATI CLASSES (CA Chandan Agarwal)

Class 11 : Accountancy
Chapter 5 : Accounting Equation

 Accounting Equation is a mathematical expression which shows that the Assets of a

business are always equal to the total of Capital and Liabilities.
 Accounting Equation is based on Dual aspect concept.
 Accounting Equation is also known as Balance sheet equation.

Accounting Equation can be expressed as follows :

Assets = Total Liabilities

Or
Assets = External Liabilities + Internal Liabilities
Or
Assets = Liabilities + capital

Capital - It refers to the amount invested by the proprietor(Owner) in a business

enterprise. Capital is a liability from the point of view of business. Amount may be in the
form of cash, Goods or Assets. Capital = owner’s equity = net worth

Assets - Assets are the resources owned/controlled by entity having future economic
benefit. Example-Land, Building, Machinery, Furniture, Stock, Debtors, Cash balance,
Bank balance, Accrued Income, Prepaid Expenses, goodwill, software, patents, etc.

Liability - Amount payable by the business to outsiders is termed as liability.Example –

Creditors, Outstanding Expenses, Loans taken,etc

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Some important rules

1. Capital increases by the amount of additional capital introduced, Profits, Income

and decreases by drawings, losses and expenses.

2. Interest on capital – No affect on Accounting equation

3. Interest on Drawings – No affect on accounting Equation

4. Outstanding Expenses are those expenses which have been incurred but have not
been paid.
 Deduct from Capital as it is an expense and will reduce profit for the current
accounting period.
 Make a new column on the Liabilities side in the name of 'Outstanding Expenses'
as the amount is still to be paid.

5. Prepaid Expenses are those expenses which have been paid in advance, ie, they are
not yet due but paid.
 Deduct from Cash as there is an outflow of cash.
 Make a new column on the Assets side in the name of 'Prepaid Expenses' as the
amount is paid in advance.
6. Accrued Income is that income which has been earned but not received during the
current accounting period.
 Add in Capital as it is an income and will increase profit for the current
accounting period.
 Make a new column on the Assets side in the name of 'Accrued Income' as the
amount is still to be received.

7. Unearned Income or Income Received in Advance is that income which has been
received but not earned during the current accounting period.

 Add in Cash as there is inflow of cash.

 Make a new column on the Liabilities side in the name of 'Unearned Income as
the amount is received in advance.

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 Types of Transactions Affecting Accounting Equation
1. Increase in one Asset and Decrease in  Purchase of goods in cash
other Asset:  Sale of goods on credit
2. Increase in an Asset and simultaneously  Purchase of goods on credit
Increase in a Liability  Loan taken from Bank
3. Increase in Asset and Increase in Capital  Introduction of Capital
or Owner's Equity  Interest Received
4. Decrease in an Asset and  Payment to Creditors
simultaneously Decrease in a Liability  Repayment of Loan
5. Decrease in an Asset and  Drawings
simultaneously Decrease in Capital  Rent Paid
6. Increase in one Liability and Decrease in  Acceptance of Bills Payable
other Liability
7. Increase in Liability and decrease in  Outstanding expenses
capital

Cash Vs Credit Transactions

Transactions of sale or purchase of Goods/Assets

a) When Name of Seller or Buyer is Given, WITHOUT the use of words 'Cash': In such a
case, it is considered a credit transaction. For example, 'Goods sold to Amit for Rs
10,000' is considered a credit transaction.
b) When Name of Seller or Buyer is Given, WITH use of words 'Cash': In such a case, it
is considered a cash transaction. For example, 'Goods sold to Amit for Rs 10,000 in
cash' is considered a cash transaction.
c) When Name of Seller or Buyer is NOT Given: In such a case, it is considered a cash
transaction. For example, 'Goods sold for Rs 10,000' or 'Goods sold for Rs 10,000 in
cash' are cash transactions.

Transactions of Expenses and Incomes

a) While making payment for Expenses, even if name of the party receiving the
payment is given, still it is a cash transaction.
b) While receiving amount in case of Incomes, even if name of the party making the
payment to us is given, still it is a cash transaction
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Practical Questions (T.S.Grewal 2024 edition)

Q 1. What will be effect of the following on the Accounting Equation?

(i) Started business with cash Rs 45,000
(ii) Opened a Bank Account with a deposit of Rs 4,500
(iii) Bought goods from M/s Sun & Co for Rs 11,200

Q 2. Show the Accounting Equation for the following transactions:

(i) Gopinath started business with cash Rs 25,000
(ii) Purchased goods from Shyam Rs 10,000
(iii) Sold goods to Sohan costing Rs 1,800 Rs 1,500
(iv) Gopinath withdrew from business Rs 5,000

Q 3. Prepare an Accounting Equation and Balance Sheet on the following basis:

(i) Gurman started business with cash Rs 20,000.
(ii) He purchased furniture for Rs 2,000.
(iii) He paid rent of Rs 200.
(iv) He purchased goods on credit Rs 3,000.
(v) He sold goods (cost price Rs 2,000) in cash for Rs 5,000

Q 4. Prepare Accounting Equation from the following:

(i) Started business with cash Rs 1,00,000 and Goods Rs 20,000.
(ii) Sold goods worth Rs 10,000 for cash Rs 12,000.
(iii) Purchased furniture on credit for Rs 30,000.

Q 5. Develop an Accounting Equation from the following transactions:

(i) Mohan commenced business with cash Rs 50,000
(ii) Purchased goods for cash Rs 30,000
(iii) Purchased goods on credit Rs 20,000
(iv) Sold goods (costing 10,000) for Rs 12,000
(v) Bought furniture on credit Rs 2,000
(vi) Paid cash to a creditor Rs 15,000
(vii) Salary paid Rs 1,000

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Q 6. Prepare an Accounting Equation on the basis of the following transactions:
(i) Started business with cash Rs 70,000.
(ii) Credit purchase of goods Rs 18,000.
(iii) Payment made to creditors in full settlement Rs 17,500.
(iv) Purchase of machinery for cash 20,000
(v) Depreciation on machinery Rs 2,000

Q7. Show the effect of the following transactions on the Accounting Equation:
(i) Started business with cash Rs 50,000
(ii) Salaries paid Rs 2,000
(iii) Wages outstanding Rs 200
(iv) Interest due but not paid Rs 100
(v) Rent paid in advance Rs 150

Q 8. What will be the effect of the following on the Accounting Equation?

(i) Harish started business with cash Rs 18,000
(ii) Purchased goods for cash Rs 5,000 and on credit Rs 2,000
(iii) Sold goods for cash Rs 4,000 (costing 2,400)
(iv) Rent paid Rs 1,000 and rent outstanding Rs 200

Q 9.Show the effect of the following transactions of M/s Royal Traders

a) Started business with cash Rs 1,20,000
b) Purchased goods for cash Rs 10,000.
c) Rent received Rs 5,000.
d) Salary outstanding Rs 2,000.
e) Sold goods for cash (costing Rs 5,000) Rs 7,000.
f) Goods destroyed by fire Rs 500.

Q 10. Prove that the Accounting Equation is satisfied in all the following transactions of
Suresh. Also prepare a Balance Sheet.
(i) Commenced business with cash Rs 60,000
(ii) Paid rent in advance Rs 500.
(iii) Purchased goods for cash Rs 30,000 and credit Rs 20,000.
(iv) Sold goods for cash Rs 30,000 costing 20,000.
(v) Paid salary Rs 500 and salary outstanding being Rs 100.
(vi) Bought motorcycle for personal use Rs 5,000.

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Q 11. Show the effect of the following transactions and also prepare a Balance Sheet:
(i) Started business with cash Rs 60,000.
(ii) Rent received Rs 2,000.
(iii) Accrued interest Rs 500.
(iv) Commission received in advance Rs 1,000.
(v) Amount withdrawn Rs 5,000.

Q 12.Raghunath had the following transactions in an accounting year:

(i) Commenced business with cash 50,000.
(ii) Paid into bank 10,000.
(iii) Purchased goods for cash Rs 20,000 and credit Rs 30,000.
(iv) Sold goods for cash costing Rs 30,000 for Rs 40,000
(v) Rent paid Rs 500.
(vi) Rent outstanding Rs 100.
(vii) Bought furniture Rs 5,000 on credit.
(viii) Bought refrigerator for personal use Rs 5,000.
(ix) Purchased motorcycle for cash Rs 20,000.
Create an Accounting Equation to show the effect of the above and also show his
Balance Sheet.

Q 13. Prepare an Accounting Equation from the following:

(i) Started business with cash Rs 50,000 and goods Rs 30,000.
(ii) Purchased goods for cash Rs 30,000 and on credit from Karan Rs 20,000.
(iii) Goods costing Rs 40,000 were sold for Rs 55,000.
(iv) Withdrew cash for personal use Rs 10,000.
(v) Rent outstanding Rs 2,000.

Q 14. Prepare Accounting Equation from the following:

a) Started business with cash Rs 1,00,000.
b) Purchased goods for cash Rs 20,000 and on credit Rs 30,000.
c) Sold goods for cash costing Rs 10,000 and on credit costing Rs 15,000 both at a
profit of 20%.
d) Paid salaries Rs 8,000.

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Q 15. Show an Accounting Equation for the following transactions:
(i) D. Mahapatra commenced business with cash Rs 50,000 and Rs 1,00,000 by
cheque, goods Rs 60,000; machinery Rs 1,00,000 and furniture Rs 50,000.
(ii) 1/3rd of the above goods sold at a profit of 10% on cost and half of the payment
is received in cash.
(iii) Depreciation on machinery provided @ 10%.
(iv) Cash withdrawn for personal use Rs 10,000.
(v) Interest on drawings charged @ 5%
(vi) Sold goods for Cash Rs 10,000 at par.

Q 16. Show an Accounting Equation on the basis of the following transactions:

(i) Sunil started business with cash Rs 1,50,000
(ii) Opened a Bank Account by depositing cash Rs 25,000
(iii) He sold his personal car and deposited the amount in the firm's Bank Account Rs
50,000
(iv) He purchased a building and furniture for Rs 1,00,000
(v) He purchased goods from Ram on credit Rs 50,000
(vi) He paid cartage Rs 5,00
(vii) He sold to Shyam on credit goods costing Rs 6,000 for Rs 9,000
(viii) Received rent from tenants Rs 1,000
(ix) Received security deposit from tenants Rs 1,500
(x) Purchased stationery for cash Rs 100
(xi) Invested in shares (personal) Rs 50,000
(xii) Received interest in cash Rs 200
(xiii) Introduced fresh capital Rs 25,000
(xiv) Goods destroyed by fire Rs 5,00

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Calculation of Total Assets, Opening and Closing Capital, Profit and Loss and
External Equities

Q 17. If the capital of a business is Rs 3,00,000 and liabilities are Rs 50,000, loss Rs 70,000,
calculate the total assets of the business.

Q 18. If total assets of a business are Rs 1,30,000 and net worth is Rs 80,000, calculate the
creditors.

Q 19. A commenced his cloth business on 1st April, 2023 with a capital of Rs 30,000. On
31st March 2024, his assets were worth Rs 50,000 and liabilities of Rs 10,000. Find
out his closing capital and profits earned during the year.

Q 20. Calculate the total assets if

(i) Capital is Rs Rs 40,000
(ii) Creditors are Rs 25,000
(iii) Revenue during the period is Rs 50,000
(iv) Expenses during the period are Rs 40,000

Q 21. (a) Gurman had a capital of Rs 75,000 on 1st April, 2023. He had also goods
amounting to Rs 15,000 which he had purchased on credit and the payment had not
been made. Find out the value of the total assets of the business
(b) After a period of one month, he came to know that he had suffered a loss of Rs
1,700. He withdrew Rs 800 for his personal use. Find out his capital and assets of the
business.

Q 22. (a) Mohan started a business on 1st April, 2023 with a capital of Rs 10,000 and
borrowed Rs 3,000 from a friend. He earned a profit of Rs 5,000 during the year
ended Rs 31st March, 2024 and withdrew cash Rs 4,000 for personal use. What is his
capital on 31st March, 2024 ?
(b) Mahesh started a business with a capital of Rs 15,000 on 1st April, 2023. During
the year, he made a profit of Rs 3,000. He owes Rs 2,500 to suppliers of goods. What
is the total of assets in his business on 31st March, 2024 ?

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Q 23. On 31st March, 2024, the total assets and external liabilities were Rs 2,00,000 and
Rs 6,000 respectively. During the year, the proprietor had introduced capital of Rs
20,000 and withdrawn Rs 12,000 for personal use. He made a profit of Rs 20,000
during the year. Calculate the capital as on 1st April, 2023.

Q 24. Mohan started a business on 1st April, 2023 with a capital of Rs 25,000 and a loan
of Rs 12,500 borrowed from Shyam. During 2023-24, he had introduced additional
capital of Rs 12,500 and had withdrawn Rs 7,500 for personal use. On 31st March,
2024, his assets were Rs 75,000. Find out his capital as on 31st March, 2024 and
profit made or loss incurred during the year 2023-24.

Q 25. Calculate the amount of External Equities as on 31st March, 2024 in the following
cases
(i) On 31st March, 2024, total assets and capital were Rs 15,00,000 and Rs
10,50,000 respectively.
(ii) On 1st April, 2023, Mukesh started business with a capital of Rs 3,00,000 and a
loan of Rs 3,00,000 borrowed from a friend. During the year, he earned a profit
of Rs 1,50,000. On 31st March, 2024, the total assets were Rs 15,00,000.
(iii) On 1st April, 2023, Ramesh started business with a capital of Rs 3,00,000 and a
loan of Rs 3,00,000 borrowed from a friend. During the year, he earned a profit
of Rs 1,50,000, introduced an additional capital of Rs 1,80,000 and had
withdrawn Rs 90,000 for his personal use. On 31st March, 2024 total assets were
Rs 15,00,000.

Q 26. Pranav started business on 1st April, 2023 with capital of Rs 5,50,000. On 31st
March, 2024 his total assets were Rs 10,75,000 and liabilities were Rs 2,92,500.
Calculate the amount by which his capital has increased as on 31st March, 2024.

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Additional Questions
Q1. Prepare an accounting equation from the following transactions:
a) Sunil started business with Cash Rs 1,00,000, Bank balance Rs 50,000, Goods Rs
40,000 and Furniture Rs 30,000.
b) Purchased goods from sohan for Rs 30,000
c) Sold goods costing Rs 10,000 for Rs 12,000
d) Cash Rs 10,000 and Goods Rs 5000 withdrawn for personal use.
e) Salaries paid Rs 5,000 and Outstanding salaries Rs 1,000
f) Payment made to creditors in full settlement Rs 29,500 by cheque.
g) Interest on drawings charged @ 10%
h) Interest on capital is to be provided @ 5%.
i) Depreciate furniture @20%
j) Cash deposited into bank Rs 10,000
Q2. Prepare an accounting equation from the following transactions:
a) Started business with cash Rs 2,00,000
b) Purchased goods for cash Rs 20,000 and on credit Rs 30,000
c) Sold goods for cash costing Rs 10,000 and on credit costing Rs 15,000 both at a
profit of 20% on cost.
d) Purchased furniture on credit Rs 50,000
e) Bought motorcycle for Personal use Rs 50,000
f) Rent paid Rs 10,000 out of which Rs 2000 is paid in advance.
g) Bad debt amounted to Rs 5,000.
h) Remaining debtors paid the amount due after availing a cash discount of 10%.
Q3.Prepare an accounting equation from the following transactions:
a) Sunil started business with Cash Rs 1,50,000
b) Opened a Bank Account by depositing Rs 20,000 out of cash
c) He sold his personal car for Rs 50,000 and deposited the amount in the
firm’s bank A/c.
d) He purchased goods from Ram on credit Rs 1,00,000.
e) Rent received Rs 10,000
f) Salaries paid Rs 20,000 and Outstanding salaries Rs 10,000
g) Commission received in advance Rs 5000
h) Accrued Interest Rs 3,000
i) Goods destroyed by fire Rs 5000
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