REMEDIAL CLASS 2: ACCOUNTING EQUATION

19TH MAY, 2020 (DAY 2)



TODAY'S TOPIC IS ACCOUNTING EQUATION



Accounting Equations- Meaning and Rules for its Preparation:
Objectives

 After going through this lesson, you shall be able to understand the following concepts.

 • Meaning of accounting equations
• Steps to prepare an accounting equation
Meaning of Accounting Equations

It is a mathematical equation which shows equality between Resources obtained from funds and Sources of funds. Here resources means assets (both tangible as well as intangible) such as Land, Building, Plant and Machinery, Cash, Bank, Patents, Trademarks etc. obtained by an enterprise from its funds. On the other hand, sources of funds refer to the sources from where an enterprise has obtained funds for buying their resources. It includes, internal funds (or internal equities or owner’s equity) and external funds (or external equities or borrowed funds). Internal funds represent the amount invested by the owner in the business and external funds show the amount obtained from the outsiders creating financial obligation on an enterprise.
Therefore, an accounting equation can be represented as:
Resources obtained from Funds = Sources of funds;
or
Total Assets = Internal Fund (or Internal Equities or Owner's Equity) + External Fund (or External Equities);
or
Simply as, Assets = Capital + Liabilities

External Parties (outsiders) have their claim in priority to Internal Party (owner) over the assets of an enterprise.
 Therefore, internal fund balance (or capital) is a residual balance of total assets, left after paying off the external funds (or liabilities) i.e. Capital = Assets – Liabilities.    
As each business transaction has two sided effect, therefore, both the sides of an accounting equation always stands equal. This is also based on the accounting principle of duality.

Steps to prepare an accounting equation
(1) Analyse transaction in detail and identify how assets, liabilities and capital balances are affected by it.
(2) Effect in terms of increase or decrease in the balance of assets, liabilities or capital is identified.
(3) If there is an increase then it is added to and if there is a decrease then it is subtracted from the respective asset, liability or capital account.  
(4) At last, ensure that total of Left side represented by Assets is always equal to total of Right side represented by the sum of Liabilities and Capital.

Effect of Transaction on the Accounting Equation

As we consider all the transactions from the business point of view, so whenever we consider effects of any transaction on the assets, liabilities or capital, then we have to keep two things in mind.
(i) Measure effect of a transaction in terms of increase or decrease in the balance of asset, liabilities or capital.
(ii) Both sides of the equation should always be equal.
Note- If after taking any effect of a transaction, both sides of the equation mismatch or becomes unequal, then surely there is a mistake on your side in taking an effect of the transaction. In no case, both sides can get unequal because in accounts we record all the transactions on the principle of duality. As per this principle, every transaction has a dual effect of debit and credit with the same amount or simply, there is an increase and decrease with same amount. Therefore, both the sides i.e. Assets (Left side) and sum of Capital and Liabilities (Right side) always stands equal.

WATCH THE ILLUSTRATIVE VIDEO BY CLICKING ON THE LINK:


Example 1  Adil Traders started business with cash of Rs 35,000. For his business, following transactions are to be recorded.
(i) Purchased goods of Rs 30,000 on credit.
(ii) Paid rent of Rs 8,000.
(iii) Withdrawn Rs 5,000 for paying his son’s school fees.
(iv) Purchased chairs for office use Rs 3,000.
(v) Sold goods costing Rs 1,750 for Rs 2,250.
(vi) Interest on drawings charged @ 10%
Prepare Accounting Equation.
Solution
S.No.

Transactions
Assets
=
Liabilities
+
Capital
Cash
(Rs)
+
Stock
(Rs)
+
Furniture
(Rs)
=
Creditors
(Rs)


(Rs)

Started business with cash
35,000




=


35,000

35,000




=


35,000
(i)
Purchased goods on credit

+
30,000


=
30,000



35,000
+
30,000


=
30,000
+
35,000
(ii)
Paid rent
–8,000




=


–8,000
(rent)

27,000
+
30,000


=
30,000
+
27,000
(iii)
Withdrawn cash for paying son’s school fees
–5,000







–5,000

22,000
+
30,000


=
30,000
+
22,000
(iv)
Purchase chairs for office use
–3,000


+
3,000
=




19,000
+
30,000
+
3,000
=
30,000
+
22,000
(v)
Sold goods costing Rs 1,750 for Rs 2,250
2,250
+
–1,750




+
500
(profit)


21,250
+
28,250
+
3,000
=
30,000
+
22,500
(vi)
Interest on drawings @ 10%








–500
(Expense for Proprietor)










+500
(Gain for
Business)


21,250
+
28,250
+
3,000
=
30,000
+
22,500












Total Assets
=
Liabilities
+
Capital
Cash + Stock + Furniture
=
Creditors
+
Capital
21,250+28,250+3,000
=
30,000
+
22,500
52,500
=
30,000
+
22,500






Example 2 Randeep started business with cash of Rs 60,000. Following transactions occurred during the year.
(i) Purchased goods of Rs 20,000 from Vikrant in cash.
(ii) Sold goods to Kapil costing Rs 4,200 at a loss of Rs 600 in cash.
(iii) Sold goods on credit (costing Rs 3,000) at a profit of 20% on cost.
(iv) Deposited into Bank Rs 10,000.
(v) Commission Received of Rs 2,500.
(vi) Stationery purchased for Rs 350.

Prepare Accounting Equation.

Solution
S.No.

Transactions
Assets
=
Liabilities
+
Capital
Cash
(Rs)
+
Stock
(Rs)
+
Debtors
(Rs)
+
Bank
(Rs)
=



(Rs)

Started business with cash
60,000






=


60,000

60,000






=


60,000
(i)
Purchased goods for cash
–20,000
+
20,000




=




40,000
+
20,000




=


60,000
(ii)
Sold goods to Kapil costing Rs 4,200 at a loss of Rs 600 in cash.
3,600
+
–4,200




=


–600
(loss)

43,600
+
15,800




=


59,400
(iii)
Sold goods on credit (costing Rs 3,000) at a profit of 20% on cost.

+
–3,000
+
3,600





+600
(profit)

43,600
+
12,800
+
3,600


=


60,000
(iv)
Deposited Cash into the bank
–10,000




+
10,000
=




33,600
+
12,800
+
3,600
+
10,000
=


60,000
(v)
Commission Received
2,500









2,500
(income)

36,100
+
12,800
+
3,600
+
10,000
=


62,500
(vi)
Stationery purchased
–350









–350
(Expenses)


35,750
+
12,800
+
3,600
+
10,000
=


62,150














Total Assets
=
Liabilities
+
Capital
Cash + Stock +Debtors+ Bank
=

+
Capital
35,750+12,800+3,600+10,000
=
0
+
62,150
62,150
=
0
+
62,150





Example 3 From the following particulars of Laxman Sharma, Prepare accounting equation.
(i) Started business with Cash Rs 50,000, Building Rs 2,50,000 and Furniture Rs 15,000.
(ii) Took a bank loan of Rs 30,000.
(iii) Purchased goods of Rs 20,000 in cash and Rs 15,000 on credit.
(iv) Goods costing Rs 3,000 sold at 20% profit on cost.
(v) Sold 30% of goods at a profit of 25%.
(vi) Sold 20% of the remaining goods at a profit of 10%.
(vii) Introduced additional capital of Rs 20,000.
(viii) Commission of Rs 3,200 received in advance.
(ix) Received securities deposit of Rs 20,000 from tenants.
(x) Paid Life Insurance Premium of Rs 11,000.
Solution
S.No.

Transactions
Assets
=
Liabilities
+
Capital
Cash
(Rs)
+
Building
(Rs)
+
Furniture
(Rs)
+
Stock
(Rs)
=
Bank Loan
(Rs)
+
Creditors
(Rs)
+
Commission Received in Advance (Rs)
+
Security
Deposits
(Rs)


(Rs)
(i)
Started business with cash, building and furniture
50,000
+
2,50,000
+
15,000


=








3,15,000

50,000
+
2,50,000
+
15,000


=








3,15,000
(ii)
Took a bank loan of Rs 30,000.
30,000






=
30,000









80,000
+
2,50,000
+
15,000


=
30,000
+






3,15,000
(iii)
Purchased goods of Rs 20,000 in cash and Rs 15,000 in credit.
–20,000
+



+
35,000
=

+
15,000







60,000
+
2,50,000
+
15,000
+
35,000
=
30,000
+
15,000
+




3,15,000
(iv)
Sold goods (costing Rs 3,000) at a profit of 20% on cost.
3,600
+



+
–3,000
=








+600
(profit)

63,600
+
2,50,000
+
15,000

32,000
=
30,000
+
15,000
+




3,15,600
(v)
Sold 30% of goods at a profit of 25%. (9,600 × 1.25)
+12,000




+
–9,600
=



+




2,400
(profit)

75,600
+
2,50,000
+
15,000
+
22,400
=
30,000
+
15,000





3,18,000
(vi)
Sold 20% of the remaining goods at a profit of 10%.(4,480 × 1.10)
4,928




+
–4,480
=



+




448
(profit)

80,528
+
2,50,000
+
15,000
+
17,920
=
30,000
+
15,000
+




3,18,448
(vii)
Introduced additional capital of Rs 20,000.
20,000















20,000
(Additional Capital)

1,00,528
+
2,50,000
+
15,000
+
17,920
=
30,000
+
15,000
+




3,38,448
(viii)
Commission of Rs 3,200 received in advance.
3,200










+
3,200





1,03,728
+
2,50,000
+
15,000
+
17,920
=
30,000
+
15,000
+
3,200


+
3,38,448
(ix)
Received securities deposits of Rs 20,000 from tenants.
20,000













20,000



1,23,728
+
2,50,000
+
15,000
+
17,920
=
30,000
+
15,000
+
3,200
+
20,000
+
3,38,448
(x)
Paid Life Insurance Premium of Rs 11,000
–11,000















–11,000
(Drawings)

1,12,728
+
2,50,000
+
15,000
+
17,920
=
30,000
+
15,000
+
3,200
+
20,000
+
3,27,448




















Total Assets
=
Liabilities
+
Capital
Cash + Building + Furniture + Stock
=
Bank Loan + Creditors + Commission Received in Advance + Security Deposits
+
Capital
1,12,728 + 2,50,000 + 15,000 + 17,920
=
30,000 + 15,000 + 3,200 + 20,000
+
3,27,448
3,95,648
=
68,200
+
3,27,448
3,95,648
=
3,95648


Total Stock of Goods: 20,000 + 15,000 = 35,000
Sales:
Sold on Credit: 3,000
30% Sold at profit of 25%: 30% of 32,000 (35,000 – 3,000) = 9,600
20% of remaining sold at profit of 10%:20% of 22,400 (35,000 – 3,000 – 9,600) = 4,480

WATCH THE ILLUSTRATIVE VIDEO BY CLICKING ON THE LINKS BELOW


PREPARATION OF ACCOUNTING EQUATIONS PART 3
REFERENCE TO THE CONTEXT:
                                                                       Capital A/c


Date
Particulars
J.F
Amount
Date
Particulars
J.F
Amount




To Drawings
To Loss
To Bal c/d

   ____
   ____
   ____



By Bal B/d
By Bank
By Profits

   ____
   ____
   ____
.   
  ASSIGNMENT # 1

Following transactions are based on compound entry, opening entry, trade discount and cash discount, as discussed in the previous class.

1.Received ₹1250 from Raman in full settlement of his account for ₹ 1300.

2. Paid ₹ 370 to Ram in full settlement of his account for ₹ 400.

3..Cheque received from Shyam ₹1120 in full settlement of ₹1200. Cheque is deposited on the same date.

4. The following balances existed in the books of Shyam traders as on 1st April, 2019. Pass the opening entry.
Assets: Cash ₹100000, Debtors ₹40000 (Amit ₹ 12000, Shyam, ₹ 17000, Kapil ₹ 11000), Furniture ₹ 20,000, Plant and machinery ₹ 70000
Liabilities: Creditors ₹ 55000, Bank Loan ₹ 30000.

5. Sold goods to Pankaj at a list price of ₹ 50000 less 20% trade discount.

6. Pankaj returned goods of the list price of ₹ 4,000.

7. Received from Pankaj the amount due from him under a cash discount of 5%.

8. Bought goods for cash of the list price ₹100000 at 20% trade discount and 5% cash discount.

9. Sold goods for cash of the list price ₹ 20000 at 10% trade discount and 3% cash discount.

10. Bought goods from Nupur for ₹ 200000 at 5% cash discount and 10% trade discount. Half the amount paid by cheque at the time of purchase.

11. Sold goods to Anuradha for ₹ 100000 on terms 10% trade discount and 5% cash discount if the payment is received within 15 days. 80% payment is received within the time frame by cheque.

12. Purchased goods costing ₹ 100000 from Sahil & Co. Paid 60% immediately by cheque to avail 5% discount.


ANSWER TO ASSIGNMENT # 1

DATE
PARTICULARS
LF
DEBIT (Rs.)
CREDIT (Rs.)
1
Cash A/c…        Dr Disc.allowed A/c...Dr 
To  Raman A/c

(Being cash received in full settlement)

1250
   50


  1300


2
Ram A/C…  Dr
To Cash A/c
To Disc. recd.A/c

(Being cash paid to Ram in full settlement)

 400

  370
    30


3
Bank A/C…    Dr
Disc.allowed... Dr.
To Shyam's A/c

(Being cheque recd in full settlement)

1120
    80

 2,000
4
Cash A/C…Dr
Debtors' A/c...Dr
Furniture A/c ...Dr.
Plant & Machinery...Dr
               To Creditors' A/c
               To Bank Loan A/c
               To CapitalA/c

(Being opening entry passes))

100000
  40000
  20000
  70000




 55000
 30000
145000
5
Pankaj's  A/C…Dr
To Sales A/C 

(Being goods sold)

 40000

 40000
6
Sales Return  A/C…Dr
To Pankaj"s A/C

(Being goods returned by Pankaj)


 3200

  3200
7
Cash A/c…Dr
Disc. allowed...Dr
To Pankaj's A/C

(Being amount received from Pankaj at discount)


  34960
    1840


 36800
8
Purchases A/c…Dr
To Cash A/C
To Disc. recd. A/c

(Being goods purchased for cash at discount)


80000

76,000
  4,000
9
Cash A/C…Dr
Disc. allowed A/c...Dr.
To Sales A/c

(Being goods sold for cash at a discount)


 17460
     540


18000
10
Purchases A/C…Dr
To Bank A/C
To Disc. Recd. A/c
To Nupur's A/c

(Being goods purchased for cash at discount and credit)


1,80,000

 85,500
   4,500
 90,000
11
Bank  A/C…Dr 
Disc. all. A/C....Dr
Anuradha's A/c...Dr.
To Sales A/C

 (Being goods sold for cash and credit)


68400
  3600
18000




90000
12
Purchases A/C…Dr
To Sahil & Co. A/C
To Bank A/c
To Disc. Recd. A/c

(Being goods purchased for cash and credit)



1,00,000

40,000
57,000
  3,000











                                                

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