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Illustration 1
Show the impact of following transactions on Accounting Equation
1. Gurman started business with cash Rs 1,00,000
2. Purchased goods in cash Rs 50,000
3. Purchased furniture from M/S Samrat Furniture Rs 20,000
4. Sold goods costing Rs 25,000 for 35,000 against cash
5. M/s Samrart furniture was paid in cash
In this case,there are 5 transactions
Transaction 1
Effects
Cash is an Asset which Increases by 100000
Capital also increases by 100000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | |
| Cash | |||||
| Sunil Started business with cash Rs 1,00,000 | 100000 | 0 | 100000 |
Transaction 2
Purchased goods in cash Rs 50,000
Effect
Stock is an Asset which Increases by 50000
Cash is an Asset which decreases by 50000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | ||
| Cash | Stock | |||||
| Old Balance | 100000 | = | 0 | + | 100000 | |
| Purchased goods in cash Rs 50,000 | -50000 | +50000 | = | 0 | + | 0 |
| New Equation | 50000 | +50000 | = | 0 | + | 100000 |
Transaction 3
Purchased furniture from M/S Samrat Furniture Rs 20,000
Effect
Furniture is an Asset which Increases by 20000
Ms samrat is a creditor which increases the liabilty by 20000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | |||
| Cash | Stock | Furniture | Creditor | ||||
| Old Balance | 50000 | +50000 | = | 0 | + | 100000 | |
| Purchased furniture from ms Samrat Furniture Rs 20,000 | +20000 | = | 20000 | + | 0 | ||
| New Balance | 50000 | +50000 | +20000 | = | 20000 | + | 100000 |
Transaction 4
Sold goods costing Rs 25,000 for 35,000 against cash
Effect
Goods/stock is an Asset which Decreases by 25000
Cash is an Asset which Increases by 35000
Profit earned Rs 10000 will increase the capital
| Assets | = | Liability | + | Capital | |||
| Cash | Stock | Furniture | Creditor | ||||
| Old Balance | 50000 | 50000 | +20000 | = | 20000 | + | 100000 |
| Sold goods costing Rs 25,000 for 35,000 against cash | +35000 | -25000 | = | + | 10000 | ||
| New Balance | 85000 | 25000 | +20000 | = | 20000 | + | 110000 |
Transaction 5
M/s Samrat furniture was paid in cash
Effect
M/s Samrat is a creditor which decreases the liabilty by 20000
Cash is an Asset which decreases by 20000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | |||
| Cash | Stock | Furniture | Creditor | ||||
| Old Balance | 85000 | 25000 | +20000 | = | 20000 | + | 110000 |
| M/S samrart furniture was paid in cash | -20000 | = | -20000 | + | |||
| New Balance | 65000 | +25000 | +20000 | = | 0 | + | 110000 |
Illustration 2
Prepare Accounting Equation from the following transactions
1. Started business with cash Rs 70,000
2. Credit Purchases of goods Rs 18,000
3. Payment made to creditors in full settlement Rs 17,500
4. Purchase of machinery for cash Rs 20,000
In this case, there are 5 transactions
Transaction 1
Started business with cash Rs 70,000
Effect
Cash is an Asset which Increases by 70000
Capital also increases by 70000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | |
| Cash | |||||
| Started business with cash Rs 70,000 | 70000 | 0 | 70000 |
Transaction 2
Credit Purchases of goods Rs 18,000
Effect
Goods/stock is an Asset which Increases by 18000
Creditor is a liabilty which Increases by 18000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | ||
| Cash | Stock | Creditors | ||||
| Old Balance | 70000 | = | 0 | + | 70000 | |
| Credit Purchases of goods Rs 18,000 | 18000 | = | 18000 | + | ||
| New Balance | 70000 | +18000 | = | 18000 | + | 70000 |
Transaction 3
Payment made to creditors in full settlement Rs 17,500
Effect
Cash is an Asset which Decreases by 17500
Creditor is a liabilty which Decreases by 18000
Discount Received will increase the capital by 500
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | ||
| Cash | Stock | Creditor | ||||
| Old Balance | 70000 | +18000 | = | 18000 | + | 70000 |
| Payment made to creditors in full settlement Rs 17,500 | -17500 | = | -18000 | + | 500 | |
| New Balance | 52500 | +18000 | = | 0 | + | 70500 |
Transaction 4
Purchase of machinery for cash Rs 20,000
Effect
Machine is an Asset which Increases by 20000
Cash is an Asset which Decreases by 20000
So Accounting Equation appears as follows
| Assets | = | Liability | + | Capital | |||
| Cash | Stock | Machine | Creditor | ||||
| Old Balance | 52500 | +18000 | = | 0 | + | 70500 | |
| Purchase of machinery for cash Rs 20,000 | -20000 | +20000 | = | 0 | + | 0 | |
| New Balance | 32500 | +18000 | +20000 | = | 0 | + | 70500 |
