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Accountancy By: - Vijay Sahu Chapter: - 5 [Accounting Equation]

Meaning of Accounting Equation

Accounting Equation is based on dual aspect concept of accounting. Accordingly, the assets of a business
are always equal to total of its liabilities and capital (owner’s equity). In equation form, this relationship
expressed as

Assets = Liabilities + Capital

The accounting equation always depicts the relationship among different components of the balance
sheet so it is also called as Balance Sheet Equation.

Treatment of Specific Items:-

1. Expenses Paid:- Cash Less

Capital Less
2. Income Received Cash Add
Capital Add

3. Outstanding Expenses:- Capital – Less

Liability – O/S Expenses Add.
4. Prepaid Expenses:- Cash – Less
Assets – Prepaid Expenses - Add

5. Accrued Income:- Capital Add

Assets Accrued Income – Add

6. Unaccrued Income:- Cash – Add

Liability Unaccrued Income – Add
7. Depreciation on Fixed Asset:- Fixed Asset – Less
Non Cash Expenses – Capital – less

8. Interest on Capital – Capital – Add

Capital – Less

9. Interest on Drawings – Capital – Add

Capital – Less

10. Profit Capital – Add

Loss Capital – Less

Some Specific Formulas:-

1. Total Assets = Total Equity
2. Capital = Owners Equity
3. Assets = Capital + Liability
4. Profit ```````````` = Closing Capital – Opening Capital
5. Closing Capital = Opening Capital + Additional Capital + Profit – Drawings – Loss
6. Profit = Revenue – Expenses

Work Sheet
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Accountancy By: - Vijay Sahu Chapter: - 5 [Accounting Equation]

1) Show the accounting equation on the basis of the following transactions and prepare a balance
sheet on the basis of last equation:
a. Mohan started business with cash 40,000
b. Purchased goods on Credit 15,000
c. Purchased furniture for cash 10,000
d. Paid rent Rs 300 and Salary Rs 700.
e. Sold goods costing Rs 12,000 on Credit. 15,000
f. Paid to Creditors 8,500
g. Received Interest 1,500
h. Withdrew cash for private use 4,000
i. Bought goods from Ram for Rs 8,000 and paid Rs 5,000 immediately.
Ans: - Cash 13,000; Stock 11,000; Furniture 10,000; Debtors 15000; Creditors 9,500; Capital
39,500.

2) Prepare Accounting equation of Amit on the basis of the following transactions:

1. Commenced business with Cash Rs 80,000.
2. Bought goods for Cash Rs 20,000 and on Credit Rs 25,000.
3. Paid wages Rs 3,000 and Rent Rs 1,000.
4. Wages outstanding Rs 1,000.
5. Sold goods costing Rs 12,000 for Rs 16,000 for cash.
6. Goods bought was returned to creditor Rs 1,000.
7. Bought furniture for cash Rs 2,000 and on credit Rs 3,000.
8. Charge interest on capital @ 10% for the year.
9. Cash deposited into bank Rs 50,000.
Also prepare his balance sheet on the basis of accounting equation.
Ans:- Cash 20,000; Stock 32,000; Furniture 5,000; Bank 50,000; Creditors 28,000; Capital 79,000.

3) Prepare accounting equation from the following transactions:

1. Sumit started business with cash Rs 10,000; Goods Rs 30,000 and machinery worth Rs
50,000.
2. Goods purchased from Ram on Credit Rs 15,000.
3. Sold goods costing Rs 20,000 for Rs 25,000 to Ruchi and received Rs 10,000 in cash.
4. Paid Rs 14,500 to Ram in full settlement of his account.
5. Ruchi returned goods for Rs 5,000 being defective.
6. Ruchi settled her account at a discount of Rs 200.
7. Withdrew cash Rs 2,000 and goods for Rs 3,000 for personal use by Sumit.
8. Charge Depreciation on machinery @ 10% for the year.
Ans: - Cash 13,300; Stock 26,000; Machinery 45,000; Debtors 0; Creditors 0; Capital 84,300.

4) Sonu had the following transactions:

1. Commenced business with cash Rs 1,00,000 of which he deposited Rs 60,000 in bank.
2. Bought goods for cash for Rs 30,000 and on credit Rs 40,000.
3. Purchased machinery for Rs 2,00,000 by raising loan form P.N. Bank, Hisar.
4. Sold goods costing Rs 20,000 @ a profit of 20% on cost to Mohan on credit.
5. Took goods of Rs 5,000 and cash Rs 4,000 for personal use.
6. Paid interest on loan Rs 4,000 and installment of bank loan Rs 20,000 by cheque.
7. Commission received in advance Rs 8,000.
8. Paid Rs 20,000 to creditor by cheque.

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9. Mohan settled his account at a discount of Rs 500.
10. Charge depreciation on machine @ 10% for the whole year.
Use accounting equation to show the effect of above transactions.
Ans: - Cash 37,500; Bank 16,000; Stock 45,000; Machine 1,80,000; Debtors 0; Capital 70,500; Adv.
Commission 8,000.

5) Show the accounting equation is satisfied in all the following transaction of Sumit:
a. Started business with cash Rs 40,000; Goods Rs 50,000; and Furniture Rs 10,000.
b. Purchased goods from Sohan Rs 20,000.
c. He sold goods purchased from Sohan for Rs 25,000 to Ram.
d. He paid Sohan in full settlement of his account Rs 19,500.
e. Received cash from Ram in full settlement Rs 24,200.
f. Paid Rent Rs 3,000 but Rs 800 is still outstanding.
g. Charge depreciation on furniture Rs 1,000.
h. Received commission Rs 2,000 including Rs 500 as advance.
i. Charge interest on Capital Rs 8,000.
Ans: - Cash 43,700; Stock 50,000; Furniture 9,000; Debtors 0; Creditors 0; Rent O/s 800; Adv.
Com. 500; Capital 1, 01,400.

6) Ramesh started business with a capital of Rs 1,00,000. Following transaction took place during
the year:
1. Deposited Rs 60,000 in bank.
2. Purchased goods from Amit Rs 30,000.
3. Sold goods costing Rs 20,000 for Rs 25,000 to Mohan out of which Rs 7,000received in cash.
4. Paid salary Rs 5,000 but salary unpaid Rs 1000.
5. Received commission Rs 2,000 including Rs 500 as advance.
6. Sold goods costing Rs 5,000 at a loss of Rs 500 in cash.
7. Received Rs 17,400 from Mohan in full settlement of his account by cheque.
8. Returned goods to Amit Rs 2,000.
9. Issued a cheque of Rs 27,200 to Amit in full settlement of his account.
Use accounting equation to give effect to above transaction.
Ans:- Cash 48,500; Bank 50,200; Stock 3,000; Debtors 0; Creditors 0 , Salary o/s 1,000; Adv. Com.
500; Capital 1,00,200.

7) Show that accounting equation is satisfied in the following cases:

1. Ajay commenced business with cash Rs 40,000 and goods Rs 20,000.
2. Sold half the goods at a profit of 25% to Ram.
3. Sold half the goods at a loss of 10% for cash.
4. Bought goods from Rakesh Rs 25,000 and paid Rs 9,000 in cash.
5. Bought furniture Rs 7,000 for office use and for Rs 3,000 for domestic purpose.
6. Paid insurance premium Rs 1,000 of which Rs 200 is prepaid.
Ans: - Cash 29,000; Stock 25,000; Debtors 12,500; Furniture 7,000, Prepaid Ins. 200; Creditors
16,000 and Capital 57,700.

8) Use accounting equation for the following transaction of Vijay:-

1. Started business with cash Rs 80,000.
2. Bought goods for cash Rs 20,000 and on credit from Ram for Rs 30,000.
3. Sold goods bought for cash to Mohan for Rs 24,000.
4. Settled the account of Ram by paying Rs 29,500.

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5. Salary paid to Ajay Rs 8,000.
6. Ajay requested for advance against salary of Rs 1,000 and he got it.
7. Paid rent Rs 7,000 but Rs 1,000 rent is still due.
8. Paid insurance premium of Rs 2,000 of which 1/4th premium is for next year.
Ans: - Cash 12,500; Stock 30,000; Debtors 24,000; Prepaid Exp. 1,500; Creditors 0; O/s Exp.
1,000; Capital 67,000.

9) Show the accounting equation is satisfied in the following cases:-

1. Ram commenced business with cash Rs 50,000 and goods Rs 30,000.
2. Sold 40% goods at a profit of 25% to Mohan.
3. Paid Salary Rs 4,000 but Rs 1000 still remains unpaid.
4. Paid insurance premium Rs 2,000 of which Rs 500 relates to next year.
5. Salary of Rs 1000 is prepaid to an employee whose son is ill.
6. Goods costing Rs 2,000 was distributed as free samples and goods worth Rs 3,000 was
withdrawn by Ram for person use.
Ans:- Cash 43,000; Stock 13,000; Debtors 15,000; Prepaid Exp. 1500; Salary O/s 1,000; Capital
71,500.

10) Find the total Assets of the firm if the capital is Rs 60,000 and Liabilities Rs 39,000.
Ans:- Total Assets 99,000.

11) Find the Capital (net worth) of the business if total assets are Rs 1,70,000and its liabilities are Rs
70,000.
Ans:- Capital[net worth] 1,00,000.

12) X commenced business on 1st April, 2009 with a capital of Rs 50,000. On 31st March, 2010, his
asset worth Rs 95,000 and liabilities of Rs 30,000. Find his capital at the end of the year and profit
earned during the year.
Ans:- Profit Rs 15,000.

13) A started business on 1st April 2009 with a Capital of Rs 1,10,000 and took loan from bank Rs
40,000. At the end of the year on 31st March, 2010 his assets were for Rs 2,50,000, creditors for Rs
70,000. Bank loan has not been paid so far; however, interest on loan has been paid. Find the
closing capital and profit earned during year.
Ans:- Closing Capital Rs 1,40,000 and Profit Rs 30,000.

14) Ram started a business on 1st January 2009 with a capital of Rs 1,00,000. During the year ending
31st December 2009, he introduced further capital of Rs 20,000 and withdraw goods and cash
worth Rs 15,000 for personal use. On 31st Dec. 2009, his assets includes cash Rs 30,000 stock Rs
80,000 Debtors Rs 40,000 and furniture Rs 30,000 and liabilities includes bank loan Rs 30,000
and creditors Rs 20,000.
Ascertain his capital at the end of 2009 and profit or loss incurred during the year.
Ans:- Profit 25,000.

15) Find the opening capital of the firm form the following information given at the end of the year:
Total Assets Rs 1,30,000; External Liabilities Rs 40,000. During the year , proprietor introduced
additional capital of Rs 20,000, withdrew Rs 15,000 for personal use and earned a profit of Rs
25,000.
Ans:- Closing Capital 90,000 and Opening Capital 60,000.

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Accountancy By: - Vijay Sahu Chapter: - 5 [Accounting Equation]

16) Show the Accounting Equation on the basis of the following transactions and prepare the Balance
Sheet at Least.
a) Shri Ganesh commenced business with Cash Rs 35000, Goods Rs 8,000, and Furniture Rs
7,000.
b) Bought furniture from M/s Mohan Furniture’s on credit for RS 3,000.
c) Purchased goods from Sohan for Cash Rs 35,000.
d) Sold goods to Shyam for Cash Rs 40,000(costing RS 30,000).
e) Bought goods from Ramesh for Rs 30,000.
f) Sold goods to Shyam costing Rs 30,000 for Rs 50,000.
g) Received Rs 49,500 from Shyam in full settlement.
h) Paid Rs 29,700 to Ramesh in full settlement.
i) Paid half the amount owed to M/s Mohan.
j) With drew Rs 1,000 for personal use.
k) Withdrew goods for personal use (cost Rs 500, sale price Rs 600).
l) Purchased household goods for Rs 15,000 giving Rs 5,000 in cash and the balance through a
loan.
m) Paid cash Rs 500 for loan and Rs 300 for interest.
n) Goods destroyed by fire (cost Rs 500, Sale Price Rs 600).
o) Paid salary Rs 500 and salary outstanding Rs 100.
p) Paid rent in advance Rs 2,000.
q) Accrued interest Rs 500.
r) Commission received in advance Rs 1,000.
s) Charged deprecation of Rs400 o furniture.
Ans: - Cash Rs 50,000, Stock 12,000, Furniture 9,600, Prepaid Expenses 2,000, Accrued incomes
500, Creditor’s 1500, lenders 9,500, Income Received in Advance 1000, O/s Exp. 100, Capital
62,000.

17) Mr. X Commenced his cloth business on 1 Jan.2001 with a Capitals of Rs 30,000. On 31 Dec.2001,
his assets were worth Rs 50,000 and liabilities of Rs 10,000. Find out his closing capital and
Profits earned during the year.
Ans: Closing Capital 40,000; Profit Rs 10,000.

18) If the capital of a Business is Rs 70,000 and Liabilities are of Rs 40,000. Calculate total assets.
Ans: - Total Assets 1, 10,000

19) Calculate total Equity if :

a) Owner’s equity in the beginning Rs 60,000.
b) Equity of creditors at the end Rs 50,000.
c) Revenue during the period is Rs 70,000.
d) Expenses during the same period are Rs 65,000.
Also calculate amount of owner’s Equity at the end.
Ans: - Total Equity 1, 15,000; and Owners Equity Rs 65,000.

20)
a) Ram started a Business on 1.1.2001with a Capital of Rs 10,000 and a loan of Rs 5,000
borrowed form Bharat. On 31 December 2001, his assets were Rs 30,000. Find out his capital
as on 31.12.2001 and profits made or losses incurred during the year 2001.
b) If the above problem 8(a) during 2001, the proprietor had introduced additional capital Rs
5,000 and had withdrawn Rs 3,000 for personal purpose, find out the profit.
c) If in the above Problem 8(a) on 31.12.2001 a part form loan, Ram owes Rs 2,500 to a
supplier of goods, find out his capital as on 31.12.2001 and profit.
Ans :- (a) Closing Capital Rs 25,000, Profit Rs 15,000.
(b) Profit Rs 13,000.
(c) Closing Capital Rs 22,500; Profit Rs 12,500.

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21) Calculate the amount of total assets and capitals as on 31.12.2001 in each of the following cases :
a) Shyam started a business on 1.1.2001 with a Capital of Rs 10,000 and a Loan of Rs 5,000
borrowed form Charat. During the year, he made a profit of Rs 5,000.
b) If in the preceding Case the proprietor had introduced additional capital of Rs 5,000 and
had withdrawn Rs 3,000 for personal use.
c) If in the preceding case, apart from loan, Shyam owes 2,500 to a supplier of goods on
31.12.2001.

Ans :- a) Closing Capital Rs 15,000 and Closing Assets Rs 20,000.

b) Closing Capital Rs 17,000 and Closing Assets Rs 22,000.
c) Closing Capital Rs 17,000 and Closing Assets Rs 24,500.

22) Arvind had the following transactions. Use accounting equations to show the effect on his assets ,
Liabilities and Capital :
a) Invested Rs 15,000 in Cash.
b) Purchased securities for Rs 7,500 in Cash.
c) Purchased a home for staff for Rs 15,000 giving Rs 5,000 in Cash and the balance through
a loan.
d) Sold securities costing Rs 1,000 for 1,500.
e) Purchased an old car for Rs 2,800 in Cash.
f) Received cash as salary Rs 3,600.
g) Paid Rs 500 for loan and Rs 300 for interest.
h) Paid Cash for household expenses Rs 300.
i) Received cash for dividend on Securities Rs 200.

23) Show the accounting equations on the basis of the following transactions
I. Manu started business with cash 50,000.
II. Purchased goods on credit 4,000.
III. Purchased goods for cash 1,000.
IV. Purchased furniture for 5,00
V. Paid rent 200
VI. Withdrew for private use 700
VII. Received interest for 100
VIII. Sold goods on credit (cost Rs 500) for 700
IX. Paid to creditors 400
X. Paid salaries for 200

24) Onkar Nath started a real estate agency business with a Cash investment of Rs 35,000. The
following business transactions have been recorded :
a) Paid three months advance rent for office accommodation Rs 2,100.
b) Bought car for Office Rs 21,000.
c) Purchased office Furniture Rs 7,000.
d) Bought office typewriter form standard Supply Company Rs 3,000.
e) Sold extra office furniture at cost to Amar for Rs 1,000. Amar paid Rs 600 in Cash and
accepted a bill at three months for the balance.
f) Amar paid the amount of the bill at maturity and Onkar Nath paid half the amount he
owed to Standard Supply Company.
g) Collected Rs 6,000 as Commission.
h) Paid telephone bill amounting to Rs 150.

Use the following headings in a tabular from and work out the effects of the foregoing
transactions on the equity of Onkar Nath through the accounting equation.
Cash +B/R +Prepaid rent+ Office Car+ Office equipment= Standard Supply Co. + Owner Equity.
Ans:- Cash 10,250, Prepaid Rent 2,100, Office Car 21,000, Office equipment 9,000, Standard
Supply Co.1500 Owner’s Equity 40,850.

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Meaning of Debit and Credit

We have read that transaction are recorded in the books of accounts on the basis of dual aspect concept.
Accordingly ,every business transaction has two aspects i.e., a debit and credit of equal amount. For every
debit, there is a credit of equal amount in one or more accounts and a vice versa. The system of
accounting is, thus called double entry system and the place where such a record is kept and maintained
is called as ‘Account’ we have separate accounts for each items such as Account of Ram, Machinery ,
Salary , Sales , Purchases, Capital etc.

Rules and Debit and Credit

From the point of view of recording , all the accounts are divided into five categories, namely a) Assets b)
Liabilities c) Capital d) Expenses/Losses e) Revenue/gains.

These rules can also be exhibited with the help of accounts

Dr. Assets A/c Cr.
Increase in Asset Decrease in Asset

Dr. Expenses (Losses) A/c Cr.

Increase in Expenses Decrease in Expenses

Dr. Liabilities A/c Cr.

Decrease in Liabilities Increase in Liabilities

Dr. Capital A/c Cr.

Decrease in Capital Increase in Capital

Dr. Revenue (Gain) A/c Cr.

Decrease in Revenue Increase in Revenue

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