Meaning
An
accounting equation is a mathematical expression which shows that the assets of
a firm are equal to sum of its liabilities and the capital contributed by the
owner. In equation form, this relationship is expressed as:
Assets
= Liabilities + Capital
The
above relationship is known as the Accounting Equation or the Balance Sheet
Equation. Recording of business transactions based on Accounting Equation
Approach is also called as Modern Approach or American Approach.
·
Accounting Equation is based on the ‘Dual
Aspect Principle’.
·
For every debit, there is a credit of equal
amount in one or more accounts and vice-versa.
·
Total claims (those of outsiders and of the
proprietor) will always equal the total assets of the firm.
·
Every transaction affects the accounting
equation but accounting equation always holds true after every transaction as
it is based on dual aspect concept of accounting.
Types of
Transactions Affecting Accounting Equation
1.
Increase in one Asset and Decrease in other
Asset. (Example- Purchase of goods in cash)
2.
Increase in an Asset and simultaneously
Increase in Liability. (Example- Purchase of goods on credit)
3.
Increase in Asset and Increase in Capital.
(Example- Interest received)
4.
Decrease in Asset and simultaneously
Decrease in Liability. (Example- Payment to Creditors)
5.
Decrease in Asset and simultaneously
Decrease in Capital. (Example- Rent paid)
6.
Increase in one Liability and Decrease in
other Liability. (Example- Acceptance of Bills Payable)
Balance Sheet
Balance
Sheet is a statement prepared with a view to measure the exact financial
position of a business on a certain fixed date. Assets are shown on the right
hand side of the Balance Sheet and all the Liabilities (i.e. external
liabilities and capital) are shown on the left hand side of the Balance Sheet.
The total of both sides of the Balance Sheet must be always equal. Format of
Balance Sheet is-
Some Questions with
Solutions
(Rs.)
1. Ram commenced business with cash 30,000
2. Purchased goods for cash 10,000
3. Bought furniture for cash 5,000
4. Bought goods on credit 15,500
5. Paid rent 1,500
Solution- Accounting Equation
 |
1. Commenced business with cash 1,00,000
2. Cash deposited into bank 60,000
3. Bought goods from X for Rs. 20,000 and paid Rs. 5,000 immediately.
4. Sold goods for Rs. 20,000 for cash which costs Rs. 15,000.
5. Returned goods to X being defective Rs. 1,000.
6. Borrowed loan Rs. 30,000 from bank.
Solution- Accounting Equation
1. Started business with cash 1,00,000
2. Cash deposited into bank 60,000
3. Bought a machine by raising a bank loan 50,000
4. Bought goods for cash Rs. 20,000 and on credit Rs. 40,000
5. Goods bought for cash was sold to Amit 25,000
6. Amit returned goods worth 5,000
7. Amit settled his account by paying 19,500
8. Paid instalment of bank loan Rs. 20,000 and paid interest by
cheque Rs. 2,000
Solution- Accounting Equation
Que. 4 X
started business on 1st April, 2019 with a capital of Rs. 1,20,000.
During the year, he introduced further capital Rs. 30,000 but withdrew Rs.
25,000 during the year for personal use. At the end of the year, his assets
worth Rs. 2,00,000 and liabilities amounting to Rs. 30,000. Determine his
capital at the end of the year and profit or loss incurred during the year
ending 31st March, 2020.
Solution-
Capital (at end) =
Assets (end) – Liabilities (end)
=
2,00,000 – 30,000
=
1,70,000 Rs.
Capital (at end) = Capital (Opening) + Additional Capital – Drawing + Profit
1,70,000 = 1,20,000 + 30,000 – 25,000 +
Profit
Profit = 1,70,000 – 1,25,000
= 45,000 Rs.
Que. 5 Open
T-shape account of furniture and put the following transactions and balance it:
(i)
Bought furniture Rs. 18,000
(ii)
A part of furniture sold Rs. 5,000
(iii)
Bought new furniture Rs. 10,000
(iv)
Charge depreciation on furniture on furniture Rs. 3,000
Solution-
Furniture
A/c
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