Accounting Equation

Key Points

• Basic Equation: Asset = Liabilities + Equity (Capital)
• Expanded Accounting Equation: Equity includes revenue and expenses
  • Revenue increases equity/capital
  • Expenses decrease equity/capital
• Balancing Principle: Adding/subtracting to one side must be mirrored on the other side

Problem Analysis

• Objective: Prepare the accounting equation based on given transactions

Transactions Breakdown

1. Started business with cash 100,000
   • Cash (Asset) increases by 100,000
   • Capital increases by 100,000
2. Purchase goods on credit from Mahesh for 25,000
   • Inventory (Asset) increases by 25,000
   • Mahesh (Liability) increases by 25,000
3. Purchase goods for cash 5,000
   • Cash (Asset) decreases by 5,000
   • Inventory (Asset) increases by 5,000
4. Sold goods (cost 10,000) for cash 14,000
   • Inventory (Asset) decreases by 10,000
   • Cash (Asset) increases by 14,000
   • Capital increases by profit (14,000 - 10,000) = 4,000
5. Withdrew cash for personal use 10,000
   • Cash (Asset) decreases by 10,000
   • Capital decreases by 10,000
6. Invested in shares 9,000
   • Cash (Asset) decreases by 9,000
   • Investments/Share (Asset) increases by 9,000
7. Purchase furniture for cash 20,000
   • Cash (Asset) decreases by 20,000
   • Furniture (Asset) increases by 20,000
8. Paid Mahesh in full settlement for 23,000 (Original liability: 25,000)
   • Cash (Asset) decreases by 23,000
   • Mahesh (Liability) decreases by 25,000
   • Capital increases by the discount received = 2,000
9. Depreciation on furniture 10% (20,000 x 10% = 2,000)
   • Furniture (Asset) decreases by 2,000
   • Capital decreases by 2,000
10. Received commission 5,000

• Cash (Asset) increases by 5,000
  • Capital increases by 5,000

Accounting Equation Table

Initial Setup

After Transactions

Final Balances

Conclusion

• Key Concepts: Understanding each transaction’s impact on the accounting equation
• Practice: Repetition and analysis of similar problems will enhance proficiency