Accounting Equation

Accounting Equation
The fundamental accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a person or business. It is the
foundation for the double-entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as:

Assets=Liabilities + Owners Equity

In shortA=L+O/E

The financial position of a company is measured by the following items:

Assets (what it owns)

Liabilities (what it owes to others)
Owner's Equity (the difference between assets and liabilities)/ Contribution from
owner owners claim)

Based on this double-entry system, the accounting equation ensures that the balance sheet
remains “balanced,” and each entry made on the debit side should have a corresponding entry
(or coverage) on the credit side.

Key points on Accounting Equation

 The accounting equation is considered to be the foundation of the double-entry

accounting system.
 The accounting equation shows on a company's balance that a company's total assets
are equal to the sum of the company's liabilities and shareholders' equity.
 Assets represent the valuable resources controlled by the company. The liabilities
represent their obligations.
 Both liabilities and shareholders' equity represent how the assets of a company are
financed.
 Financing through debt shows as a liability, while financing through issuing equity
shares appears in shareholders' equity.

Basic Accounting Equation A=L+O/E

Extended Form of Equation A=L+[O/E-D+(R-E)]

Here A=Assets, L=Liabilities, O/E=Owners Equity(Capital), D=Drawings R=Revenues, E=Expenses

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 Accounting Equation

Exercise 1:
Transactions made by Ajax Solutiona Software firm, for the month of August are shown below.
1. The owner invested Tk.25,000 cash in the business.
2. The company purchased Tk.7,000 of office equipment on credit.
3. The company received Tk.8,000 cash for software services performed.
4. The company paid Tk.850 for this month’s rent.
5. The owner withdrew Tk.1,000 cash for personal use.
Instructions:
(a) Show the effect of above transaction on Accounting Equation.
(b) Prepare an Income Statement for the month of August 2017
[Answer: Total Asset=Tk. 38150. Net Income=Tk. 7150]

Homework- 1:
Joan Robinson opens her own law office on July 1, 2019. During the first month ofoperations, the
following transactions occurred.
1. Joan invested Tk.11,000 in cash in the law practice.
2. Paid Tk.800 for July rent on office space.
3. Purchased office equipment on account Tk. 3,000.
4. Provided legal services to clients for cash Tk. 1,500.
5. Borrowed Tk. 700 cash from a Sonali Bank Ltd.
6. Performed legal services for client on accountTk.2,000.
7. Paid monthly expenses: salaries and wages Tk. 500, utilities Tk.300, and supplies Tk. 100.
8. Joan withdraws Tk.1,000 cash for personal use.
Instructions:
(a) Show the effect of above transaction on Accounting Equation.
(b) Prepare the income statement on July 31 for Joan Robinson, Attorney.
[Answer: Total Asset=Tk. 15500. Net Income=Tk. 1800]

Homework-2:
Titan Repair Shop was started on May 1 by Erica Titan. A summary of May transactions is presented
below.
1. Invested $10,000 cash to start the repair shop.
2. Purchased equipment for $5,000 cash.
3. Paid $400 cash for May office rent.
4. Paid $500 cash for supplies.
5. Incurred $250 of advertising costs in the Beacon News on account.
6. Received $6,100 in cash from customers for repair service.
7. Withdrew $1,000 cash for personal use.
8. Paid part-time employee salaries $2,000.
9. Paid utility bills $170.
10. Provided repair service on account to customers $750.
11. Collected cash of $120 for services provided in transaction (10).
Instructions
(a) Show the effect of above transaction on Accounting Equation.
(b) Compute the net income or net loss forMay 2017

[Answer: Total Asset=$13280, Net Income=$4030]

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Homework-3
Forte Disc Golf Course was opened on March 1, 2021 by Matt Forte. The following selected events
and transactions occurred during March.

Mar. 1Invested $20,000 cash in the business.

3 Purchased Heeren’s Golf Land for $15,000 cash. The price consists of land $12,000,
shed $2,000, and equipment $1,000. (Make one compound entry.)
5Paid advertising expenses of $700.
6Paid cash $600 for a one-year insurance policy.
10 Purchased golf discs and other equipment for $1,050 from Innova Company payable
in 30 days.
18 Received $1,100 in cash for golf fees earned (Forte records golf fees as service
revenue).
19 Sold 150 coupon books for $10 each. Each book contains 4 coupons that enable the
holder to play one round of disc golf.
25 Withdrew $800 cash for personal use.
30 Paid salaries of $250.
30 PaidInnova Company in full.
31 Received $2,100 cash for fees earned.

Matt Forte uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment,
Accounts Payable, Unearned Service Revenue, Owner’s Capital, Owner’s Drawings, Service
Revenue, Advertising Expense, and Salaries and Wages Expense.

Requirement:
(a) Show the effect of above transaction on Accounting Equation.
(b) Compute the net income or net loss for March 2021

Homework-4

RashedulHasan, a young Lawyer, began his practice and completed following transaction on April of
the current year:
April 1 Sold a private car for Tk. 9,00,000 and invested Tk. 8,80,000 of the proceeds in the law practice.
April 2 Rent paid three months in advance Tk. 1,20,000
April 3 Purchased office supplies for cash Tk. 10,000 (Record it as asset)
April 4 Purchased law book on account Tk. 30,000. (Record as assets named Law Library )
April 5 Purchased the law library for Tk. 27,500. Paying Tk. 8,500 in cash and balance to month.
April 7 Collected Tk. 50,000 from client for legal service.
April 10 Paid for the law books purchased on account April 4
April 15 Completed legal service on credit Tk. 80,000
April 19 Performed legal service of Tk. 55,000 but collected Tk. 45,000 instantly.
April 30 Paid monthly telephone bill of Tk. 1400
April 30 Recognized that one month's rent on the office had and become on expenses
April 30 Salary paid Tk. 10,000 for the support staff.

Required:
a) Show the effects of the transaction on accounting Equation (Prepare a Tabular Analysis)
b) Prepare a Profit or Loss Statement for Mr. Hasan.

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Classwork:
The total assets and total liabilities of SSG Ltd, a proprietorship, at the beginning and at the
end of the fiscal year 2022 are as follows:
Jan. 1 2022 Dec. 31, 2022
Total assets $280,000 $475,000
Total liabilities 205,000 130,000

a. Determine the amount of net income earned during the year 2022. The owner did not
invest any additional assets in the business during the year and made no withdrawals.

b. Determine the amount of net income during the year 2022. The assets and liabilities at the
beginning and at the end of the year are unchanged from the amounts presented above.
However, the owner withdrew $13,000 in cash during the year (no additional investments).

c. Determine the amount of net income earned during the year 2022. The assets and liabilities
at the beginning and at the end of the year are unchanged from the amounts presented above.
However, the owner invested an additional $25,000 in cash in the business in June of the
current fiscal year (no withdrawals).

d. Determine the amount of net income earned during the year 2022. The assets and liabilities
at the beginning and at the end of the year are unchanged from the amounts presented above.
However, the owner invested an additional $22,000 in cash in August of the current fiscal
year and made twelve monthly cash withdrawals of $1,500 each during the year 2022.

Class Exercise:
At the beginning of 2022 ABC Ltd had Assets of Tk. 365000 and Liabilities of Tk. 99000. During
the year Assets Increased by Tk. 13000 and Liabilities Decreased by Tk. 66000. By what amount
Owners Equity were increased or decreased?

Class Exercise:
At the beginning of 2022 ABC Ltd had Assets of Tk. 365000 and Liabilities of Tk. 499000.
During the year Assets decreased by Tk. 13000 and Liabilities decreased by Tk. 65,000. By what
amount Owners Equity were increased or decreased?

Question:
Analyze the effect of the January 2010 transactions (shown below) on the accounting
equation:

a. Received $50,000 cash from customers for subscriptions that had already been earned in
2009.
b. Received $25,000 cash from Electronic Arts, Inc., for licensing revenue earned in the
month of January 2010.
c. Purchased 10 new computer servers for $33,500; paid $10,000 cash and signed a
threeyear
note for the remainder owed.
d. Paid $10,000 for an Internet advertisement run on Yahoo! in January 2010.
e. Sold 15,000 monthly subscriptions at $15 each for services provided during the month of
January 2010. Half was collected in cash and half was sold on account.
f. Received an electric and gas utility bill for $5,350 for January 2010 utility services. The
bill will be paid in February.

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 Accounting Equation

g. Paid $378,000 in wages to employees for work done in January 2010.

h. Purchased $3,000 of supplies on account.
i. Paid $3,000 cash to the supplier in (h).

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