hi everyone welcome back to the second video of accounting equation today in this video we are going to solve this full-fledged problem but before watching this video please make sure you have watched the previous video of this where we have discussed the entire concept and the logic of this accounting equation asset is equal to liabilities plus equity or capital and we have discussed everything related to it right what it means what's its history yeah everything we have understood and also we have discussed the expanded accounting equation right we have seen how this equity thing or capital thing is expanded right and the most important part over here was that you know revenue and expenses they affect the capital or equity whenever you have income or revenue you have to add to the capital whenever you have expenses you have to deduct from the capital okay that's very important we will see this in this full-fledged example also and then you know we took a practical example also over there a simple example to understand everything and then we concluded the video with this that i said whatever we add to one side the same thing has to be added to the other side yeah then only it will be lhs is equal to rhs asset is equal to liability plus equity right whatever treatment you do on one side the same treatment has to be done on the other side plus x plus x minus x minus x okay and there can also be a nil change nail change means what the change will only be there only on the asset side yeah minus ten thousand plus ten thousand like that okay yeah so this was the first video now to understand each and everything of course you have to go and watch that now let's get back to this video and let's see this question now see here prepare the accounting equation on the basis of following transaction so here we have been given these 10 transaction and we have to prepare the whole accounting equation okay so let's analyze each transaction one by one see here it's very simple simon started business with cash one lakh very simple transaction think from the business point of view what is happening cash is increasing which is an asset and capital is also increasing by one lakh hundred thousand isn't it simple we all know that let's move on to the second transaction purchase goods from mahesh of 25 000 now the first thing you have to determine is whether it's a cash transaction yeah or it's a credit transaction whether we have paid cash or we are promising to pay in future credit transaction so now here see here nowhere cash word is written and the second thing is mahesh the person from whom we have purchased the goods the inventory that person's name is also coming right so why are we noting down the name of the person from whom we have purchased because this is a credit transaction this is a credit transaction we have to pay to mahesh in future so mahesh is our what creditor payable liability account yeah so liability in the business increasing liability to mahesh yeah mahesh account is increasing by 25 000 and we have received goods inventory or stock whatever you want to call it that is also increasing is that clear yes fine you got that let's move on to the third transaction now in third transaction what's happening purchase goods for cash 5000. now in this third transaction it is specifically mentioned the goods are purchased for cash so goods are increasing and cash is decreasing because you have paid the cash 5000 clear fine let's see fourth transaction sold goods costing 10 000 to arrive for cash 14 000 now this is a bit tricky transaction to understand see it's very simple actually see sold goods costing 10 000 so what has happened in the business goods costing 10 000 have been reduced so from inventory from stock you have to reduce 10 000 is that clear yes and then you have received the cash yeah the drive name has come but still this is a cash transaction drive is not important for us because it's a cash transaction person name is not important we have received cash of how much 14 000 goods inventory has been reduced by 10 000 because that's the cost of it and cash is increasing we have received cash of 14 000 what does that mean it means that 4000 is the profit isn't it 10 000 was the cost you have sold at 14 000 so that means 4000 is profit now who has the claim on the profit in the business of course the owner has the claim on the profit isn't it yes so that is why what will happen here understand properly three things will happen goods are reducing by ten thousand and then cash is increasing by fourteen thousand and then capital will increase by four thousand capital will increase by four thousand then only the equation will balance they'll practically see this don't worry fine okay you got that right how it will happen fine let's move on to the next transaction withdrew cash for personal use ten thousand what's happening with drew cash for personal use ten thousand that means the owner has come into the business yeah to the shop or whatever it is the place of business and took out 10 000 from the drawer okay took out 10 000 for his personal use not for the business use for personal use that means owner is taking the money home see here what is capital capital is the claim of the owner in the business if owner comes and takes out some money that means the claim of the you know owner has decreased in the business capital has decrease in the business yeah so that is why this 10 000 is what this is drawings yeah drawings so what you will do of this cash is reducing in the business cash is reducing and capital is also reducing okay because you all know in the basic video i've explained to you drawings acts against the capital whenever drawings happen whenever owner withdraws the money from the business for his personal use then what will happen capital will decrease because drawings ultimately decreases the capital is that clear yes you got that okay so cash decrease capital degrees fine the sixth one invested in shares nine thousand so here what will happen uh you know invested in shades 9000 that means cash is reducing yeah 9000 money you have invested in shares yeah you have you have an investment now so that is why cash will reduce and shares investment will increase one asset will decrease and another asset will increase is that clear nil change actually in this fine then the next transaction purchase furniture 20 000 very simple now here understand purchase furniture 20 000 is it a cash transaction or credit transaction this is a cash transaction whenever the question is silent and names of the you know any person or any company name is not mentioned that means it's a cash transaction okay if it was a credit transaction if it would have been credit transaction then they would have mentioned exactly purchase furniture 20 000 from mohan yeah purchase furniture 20 000 from santosh name would have been mentioned but now here there is no name nothing you have to assume this is a cash transaction and it is a cash transaction is that clear so what's happening in this transaction what's the impact cash is decreasing by 20 000 and furniture is increasing there was no furniture in the business now furniture from zero it is increasing to twenty thousand is that clear right the next transaction you see here paid to creditor mahesh in full settlement of twenty three thousand come back what does this mean come back see here the second transaction purchase goods from mahesh of 25 000 here what happened we got goods from mahesh on credit goods increased and mahesh liability also increased 25 000. we have to pay to my age 25 000 but then what happened after some days see here in the eighth transaction paid to creditor yeah payable mahesh in full settlement what does full settlement means it means that the account is completely finished account is mahesh account is completely finished we had to pay 25 000 but mahesh told us see let's say our name is simon right yeah so see simon you don't have to pay me 25 000 just pay me 23 000 and it's over right that's what mahesh said to simon so simon paid him 23 000 and it was a full settlement so understand properly what is happening to our business our business is gaining by 2000 isn't it see we had to pay 25 000 how much did we actually pay mahesh told us to pay only 23 and settle his account so we paid only 23 25 minus 23 2000 benefit right we have gained by 2000 we had to pay 2000 less yes it's a benefit right it's an income it's a gain isn't it this is called discount received yeah this is called discount ratio 2000 discount received is this an income fine so what is the impact of this transaction it's very simple uh cash is decreasing by 23 cash is decreasing by 23 and mahesh liability is decreasing by the whole amount it's full settlement now full settlement we don't have to pay anything in future so the entire liability which was there in the books 25 000 to mahesh that entire liability has to be scrapped off yeah entire library gone and then and then in the capital what will happen we have an income now 2000 benefit has happened income what do we do of incomes and expenses we give the effect of income and expenses in the capital also so that 2000 has to be added to the capital so cash is decreasing by 23 mahesh is decreasing by 25 and capital is increasing by two thousand because that two thousand discount receives an income and that income has to be added we always add the income to capital is that yeah because you all know expense decreases the profit income increases the profit so you know the profit which we calculate who has claim on that profit of course the owner so that is why in the accounting equation we directly give the effect of income and expenses in the capital is that clear yes and then we have ninth transaction you see here depreciation on furniture provided at 10 now what's depreciation see depreciation is very simple it's nothing but a non-cash expense that we make every year on the capital assets see what happens is whenever you purchase any asset right let's say you have purchased an asset of 10 000 okay so you don't take this to profit and loss okay you do not expense this asset immediately no what you do is because there's a future benefit of this now and it will be used for a long period of time so what you do is you take this to the balance sheet okay and then as the time passes by the acid will be used and the benefit of the acid will slowly fall isn't it because as you you know use the acid the asset will become what do you say it will wear down yeah it will vary down so that is why what we do is over its useful life we expense the asset for example let's say 10 000 the cost of the asset and let's say the useful life of the asset is 10 years so 10 000 divided by ten so that is equal to one thousand so every year for ten years what we will do every year we will reduce the we will reduce the value of the asset by one thousand and that reduction is called as depreciation slowly the asset will be depreciated will be reduced is that clear and this 1000 where it will go this will go to the income statement as an expense which will which will decrease your profit is that clear so depreciation is a non-cash expense which will decrease our profit and also the asset value will be reduced is that clear okay so it's nothing but just expensing of the asset you know slowly over the useful life of the asset we expense it we take that portion that depreciation to the income statement to the profit and loss okay fine so what is the impact of this so the impact is really simple depreciation is an expense there is no cash outflow because of depreciation it's just an expense acts against the profit okay so it's an expense and furniture value will also reduce now what is the calculation over here see here ten percent they are saying what is the cost of the furniture twenty thousand so twenty thousand into ten percent okay twenty thousand is the cost of the furniture into 0.10 yeah 10 that's equal to 2000 so 2000 will be taken to profit and loss this is the depreciation every year this is the depreciation okay so 2000 is the expense so what do you do of expenses you reduce them from the capital yeah you all know that isn't it i've told you whenever we have income or expenses incomes are added to capital and expenses are deducted from the capital so that 2000 depreciation will be deducted from capital capital will fall because profit will decrease now because of depreciation so that is why we will deduct okay and furniture is also reducing i told you yeah in the balance sheet first we take and then we slowly reduce every year so furniture value will also reduce by two thousand okay so that's the ninth transaction and then the tenth transaction we have see here very simple transaction received commission five thousand now what is this this is simple income we have received commission receive means cash is increasing 5000 cash is increasing and income also is increasing commission your commission is our income so so that income where it will go capital again capital right it's a revenue income so capital will also increase by 5 000 then only it will be lhs is equal to rhs is that okay fine so this was a summary a basic analysis of this 10 transaction now let's just see how it will be presented in that accounting equation format now see here we have the solution let's understand how to do this it's very simple you have already seen the analysis of the question so everything is finished for you so see the accounting equation asset is equal to liabilities plus capital or equity right and then you'll be wondering what is this subheadings cash stock investments furniture is equal to mahesh plus capital c it's very simple it's just the breakdown of the assets what all assets we have in this question what all liabilities we have in the question that's the breakdown okay simple but now you will also wonder sir how will we come to know immediately in the beginning only you know what sort of uh breakup we have see you will not know immediately you have to go slow what you have to do is you have to start with a small column and then slowly as you will go on seeing the transaction okay this thing is there okay another column okay this thing is there another column like that you have to approach okay not like in the beginning only you will see the whole question okay this thing is there this thing is there this thing is there okay five six columns no you will start with a small cash column or whatever the thing first you have of course you will have cash you can start with the cash okay like that and then slowly as you go on seeing the transaction will come to know okay stock is there okay investment is there okay so start with the small small columns and then you know go on fine so leave space properly you have to manage the space yeah you will practice and then you will be able to do that fine okay so the first transaction was started business with cash one lag so simple cash is increasing add in the cash add in the capital clear so when you take the balance total column one lakh is equal to one lakh clear yes the second transaction was see here the second transaction credit purchase of goods from mahesh of 25 000 mahesh is our creditor liability are payable so that is increasing and goods goods means what stock inventory whatever you want to call it right so that is also increasing the simple stock column you will make plus 25 and mahesh plus 25 clear easy yes and then see the total balance column 1 lakh 25 25 1 lakh so it's equal lhs is equal to rhs okay fine the next transaction third transaction what did we have purchased good for cash 5000. now here i have just written the summary okay just summary but you have to write the whole thing okay but here i did not have the space properly so i have just written the summary okay so cash purchase of the goods 5000 so what's happening because of this stock is increasing by 5000 inventory and cash is decreasing by 5000 no change on the on the right hand side yeah in the liabilities and capital there is no change this is nil change plus five minus five is that okay yes the next transaction you see here uh that tricky tricky transaction sold goods costing 10 000 to arrive for cash 14 000. now of course rife name is completely ignored because this is a cash transaction so what is happening i told you sold goods costing 10 000 so you will reduce the goods you will reduce the stock by 10 000 only always remember in the stock you will only deduct the cost price okay always cost price so minus 10 fine is that okay yeah so minus 10 and then and then see here cash is increasing by 14 000 you have made sales now so you will get the cash you have got cash of 14 000 so plus 14 in the cash simple whatever that has happened just put it in the accounting equation there's not much technicality over here is that okay yes so plus 14 you did minus 10 you did then you came to know see here there is a difference see cost was 10 you have sold for 14 so 4 000 profit is there isn't it simple now 4000 profit is there who has the claim on profit it is the owner who has the claim what is the owner's claim capital so you will increase the capital by 4 000 is that clear then only it will be equal see plus 14 minus 10 only plus 4 right so it is equal see the total balance column 95 plus 14 that is 1 like 9 000 30 minus 10 that is 20 000 1 lakh 9 and 20 that is 129 and see here 25 you already had so as it is and then one lakh plus four one lakh four thousand so one lakh four plus twenty five that is equal to how much that is equal to one lakh twenty nine one like twenty nine only twenty nine it will always be equal whenever you know any transaction happens it doesn't matter any transaction happen when you will see the accounting equation when you see the balance it will always be equal asset is equal to liabilities plus capital is that okay right next transaction see withdrew cash for personal use 10 000. what is this drawings yeah what happened because of drawings cash reduces capital also reduces by how much here 10 000 so see here it's very simple fifth transaction withdrew cash for personal use 10 000 so minus 10 from cash minus 10 from capital because understand owner has taken the money out of the business so owners claim what is capital what is equity owners claim in the business if owner is taking out some money from the business then of course now you are an accountant of the business you will reduce the capital isn't it yes that's what you will do fine and then the six transactions see here invested in shares nine thousand now when you saw this transaction you came to know okay there is something called a shares over here so you will write investments okay that's how you will be making the columns not at the first only you will make seven eight columns like that no you will not do that you will just leave space and you will slowly start with small small columns and then as you go on seeing the transaction you will come to know okay this column is required this column is required like that you will approach fine you got that so invested in shares 9000 cash is decreasing investment shares are increasing yeah both are assets so it's a nil change see here six transaction invested in shares so minus nine in cash and plus nine in investments okay if you see the total column the balancing column uh 99 was there minus nine that's equal to ninety thousand and then see twenty thousand as it is and then plus nine was there so that's nine thousand and here twenty five thousand as it is and the ninety four as it is there is no change on the right hand side only change over here plus nine minus nine is that clear because you took the cash and invested into shares so cash reduced investment increase clear fine and then the next transaction see here the next transaction is uh seven transaction purchase furniture twenty thousand then this was a cash purchase right so furniture increase new column came into the picture okay plus 20 and cash decrease minus 20. is that clear no change on the right-hand side as it is so see the totals 90 minus 20 that is 70 20 as it is 9 as it is plus 20 is there so 20 new total and then 25 as it is 94 as it is no change on right hand side is that clear it's very simple and then the next transaction see here pay to credit our mahesh in full settlement 23 000 and this is also a bit tricky transaction it's simple don't worry pay to credit our mahesh in full settlement that means entire value of mahesh will be finished off full settlement means the liability will be completely scrapped off so mahesh liability 25000 is there completely scrapped off how will you do that minus 25 that becomes zero okay that becomes zero and how much did you actually pay how much cash did you actually pay in the business how much cash the business paid only 23 yeah 23 000 so minus cash only 23 from cash you will only subtract 23 70 minus 23 that's equal to 47 000 20 as it is 9 as it is 20 as it is now understand there is a difference here there is minus 23 in left hand side and in right hand side you can see only minus 25 right so that means there is an inequality right so what does that mean you are missing something you are making a mistake and that mistake is you are not considering the 2000 discount which you have received from mahesh mahesh told you see simon you don't have to pay me 25 000 just pay me 23 and close my account so you paid him 23 entire liability scrapped off but 2000 benefit is there to you yeah the business is gaining by 2000 so that 2000 has to be added in the capital discount received which is an income added in the capital is that clear see here minus 23 minus 25 plus 2 000 so minus 25 plus 2000 that is 23 net 23 net isn't it minus 25 plus 2 000 is what it's equal to minus 23 minus 23 this in net minus 23 okay so whatever you subtract from you know from left hand side the same thing has to be subtracted from the right hand side is that clear yes the next transaction depreciation one uh depreciation of furniture provided at 10 10 of this furniture 20 000 that is equal to 2000 so see here depreciation on furniture 10 what you will do is really simple really simple depreciation is fall in the value of the asset right every year we reduce it right the asset by depreciation so see here we have furniture furniture right so furniture value was how much twenty thousand so we reduced it by two thousand because that was a depreciation amount so minus two thousand and it's an expense non-cash expenditure there is no cash outflow because of depreciation there will not be any cash outflow see nothing has happened you haven't paid anything it's just that the value of the furniture is decreased by 2000. okay it's an expense non-cash expense so it's an expense that means the effect has to be given in the capital yeah negative effect so capital will also reduce by 2000 you see here capital will also reduce by 2000 exactly easy yes the next thing is see here the next transaction is received commission 5000 yeah the last 10th transaction so received commission means what income cash is increasing by 5000 and it's an income now so capital is also increasing by 5000 exactly cash is increasing by 5000 and capital is also increasing by five thousand is that clear so 47 plus five that's 52 20 as it is 9 as it is 18 as it is yeah 20 minus there was 18 18 as it is 94 plus 5 that is 99 000 okay so this is how you will be doing the accounting equation now this was a full-fledged question really straightforward there is nothing much over here if you just go on practicing in your book then you will you know feel is nothing it's just that you just have to put the effect just have to understand income and expenses effect has to be given yeah whatever it is paid salary paid rent yeah all the expenses and incomes effect should be given in the capital and then these things are very easy okay it's not a big deal at all so that's it for this video i think you have got this it was a really straightforward question it was not difficult okay so that's it see you in the next video bye