7/29/2019 Chapter # 2. Acc
1/26
Accounting Equation
Chapter # 2
Gul NawazGUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
2/26
Introduction
We have discussed basic terms used in accounting. One of
the most important term is the Balance Sheet. In this chapterwe shall explain this term and show the effect of transactionon the balance sheet.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
3/26
Assets and EquitiesAssets refer to all the valuable proprieties possessed by thebusiness, while the equities means the claim against theseassets. The equity are further divided into Capital And
Liability. Capital refer to the owner equity which means rightof the owner in the asset of the business and liabilities refer tooutsider equities which means the right of outsider in theassets of the business.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
4/26
Balance Sheet EquationWhen any assets is purchased, the owner not only acquire the
property but also right associated to that property. These rightin assets are equal to the value of assets. In accounting we refer
these rights as Clime against assets or equities. From thisconcept the following equation is derived,
ASSETS = EQUITIES
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
5/26
.
As we know that a single person cannot contribute all therequired funds from his own pocket. He has to raise fund bymeans of credit purchase, loan from banks, friends and frommany sources. In this way the right against the assets i.e.equities into owner equity and outsider equities. Therefore
the balance sheet equation can be written as:
ASSETS = LIABILITIES + CAPITAL
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
6/26
Transaction and Accounting equation
When a transaction takes place, it effect in terms of
increase or decrease two basic component of accounting
equation. To illustrate this concepts the followingbusiness transaction are assumed;
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
7/26
Illustration # 11. Mr. Ali started business with Capital of $20000.
The effect of this transaction will be that the cash will
increase in business by $ 20000, and Capital of Mr. Ali willalso increase by similar amount. The equation will appear asfollow;
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
8/26
NOTE:
It is important to note that while analyzing business transaction, we
are concerned with the business activities of the enterprise which is
treated as distinct entity from its owner. Therefore investment of owner is
treated as increase in business assets on one hand as will as increase in
Capital on the other hand, and vice versa.
ASSATS = EQUITIES
CASH$ 20000
= Alis CAPITAL$ 20000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
9/26
2. Ali purchase building for $ 3000.
The transaction will change the composition of assets. The
cash will decrease by $ 3000, and building will increase by thesimilar amount. The equation will be as follows:
ASSATS = EQUITIES
CASH + Building$ 20000-(3000) $ 3000
= Alis CAPITAL$ 20000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
10/26
3. Purchase Machinery from Ahmad for $ 1000.
In this transaction the assets increase on one side, while the
liability are also increase.
ASSATS = EQUITIES
CASH + Building + Machinery$ 17000 $ 3000
$ 1000
= CAPITAL + Account Pay$ 20000
$ 1000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
11/26
4. Purchase raw material for cash $ 2000.
The transaction will change the composition of assets. The cashwill decrease by $ 2000, and material will increase by thesimilar amount. The equation will be as follows:
ASSATS = EQUITIES
CASH + Building + Machinery + Material
$ 17000 $ 3000 $ 1000
( 2000 ) 2000
= CAPITAL + Account Pay
$ 20000 $ 1000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
12/26
5. Paid salaries $ 2000.
The effect of this transaction will decrease Cash anddecrease Owner Equity by $ 2000, The equation will be asfollows:
ASSATS = EQUITIES
CASH + Building + Machinery + Material$ 15000 $ 3000 $ 1000 2000
( 2000 ) .13000 + 3000 + 1000 + 20000
190000
=
=
CAPITAL + Account Pay$ 20000 $ 1000( 2000 ) .18000 + 1000
19000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
13/26
Accounting Equation
ASSETS = EQUITIES
CASH Building Machinery Material Capital Account Pay
20000
(3000) 3000
20000
17000 3000
1000
20000
1000
17000(2000)
3000 10002000
20000 1000
15000
(2000)
3000 1000 2000 20000
(2000)
1000
13000 3000 1000 2000 18000 1000
19000 = 19000
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
14/26
ILLUSTRATION # 2
Show the effect of following transaction on assets liabilities
and owners equity.1. Ali commenced a business by investing Rs.30000.
2. Bought Office equipment for Cash Rs.500.
3. Bought furniture on account Rs.1000.
4. Paid office rent Rs.200.5. Earned Rs.2000, by performing service.
6. Paid salary to a worker Rs.300.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
15/26
ACCOUNTING EQUATION
ASSETS = EQUITIES
S.No CASH EQUIPEMENT
FURNITURE A/C REC CAPITAL A/C PAY
1 30000 30000
Balance2
30000-500 500
30000
Balance3
29500 5001000
300001000
Balance4
29500-200
500 1000 30000-200
1000
Balance5
29300 500 10002000
298002000
1000
Balance6
29300-300
500 1000 2000 31800-300
1000
Balance 29000 500 1000 2000 31500 1000GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
16/26
ILLUSTRATION # 3Rehman repair shop has the following assets and Equities onApril 2012.
Cash 3300
Account receivable $ 1900Supplies $ 1700
Tools $ 8150
Capital $ 3050
Account Payable $ 12000
During the month the following transaction take place;
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
17/26
1. Paid one month rent $ 400.
2. Bought repair supplies $ 100.
3. Paid for supply previously purchase on credit $ 500.
4. Bought tools on credit $ 350.5. Receive for service rendered $ 900.
6. Service rendered on account $ 210
7. Received from customer ( Account Receivable) $ 650.
8. Paid for oil and gas used $ 150.
Required: Show the effect of above transaction on the
accounting equation.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
18/26
ASSETS = EQUITIES
S.No CASH AccountReceivable
Supplies Tools CAPITAL AccountPayable
Balances
1
3300
-400
1900 1700 8150 3050
-400
12000
Balance2
2900-100
1900 1700+ 100
8150 2650 12000
Balance3
2800-500
1900 1800 8150 2650 15000-500
Balance4
2300 1900 1800 8150+350
2650 11500+ 350
Balance5
2300+ 900
1900 1800 8500 2650+900
11850
Balance6
3200 1900+ 210
1800 8500 3350+ 210
11850
Balance7
3200+650
2110-650
1800 8500 3760 11850
Balance8
3850-150
1460 1800 8500 3760- 150
11850
Balance 3700 1460 1800 8500 3610 11850GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
19/26
Accounting Equation for Merchandise Business
A merchandise business is one where the goods arepurchased on a lower cost and they are sold on a higher price.
The difference between sale and purchase is called profit. The
profit increase owner equity, therefore, it is added in the capital.
When the goods are purchased, their cost price is recordedunder merchandise inventory as addition on assets side. When
the goods are sold, the cost price is deducted from merchandise
inventory on the assets side and profit is added to the capital. If
the sale is on credit basis, it will increase the Account receivable,and if it is on cash basis it will increase Cash on asset side.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
20/26
ILLUSTRATION # 4
Show the effect of the following transaction on Accounting Equation;1. Anwar started Business with cash $ 55000.
2. Merchandise purchase for cash $ 12000.
3. Sold merchandise to Ali for $ 5600. Cost is $ 4480.
4. Purchase merchandise from Ahmad $ 7500.
5. Cash sales $ 1250. ( Cost $ 1000)
6. Return merchandise to Ahmad $ 150.
7. Credit purchases from Zia $ 2500.
8. Give away merchandise as charity worth $ 100.
9. Owner withdrew merchandise for personal use worth $ 250.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
ASSETS EQUITIES
7/29/2019 Chapter # 2. Acc
21/26
ASSETS = EQUITIES
S.No CASH MerchandiseInventory
AccountReceivable
CAPITAL AccountPayable
1
2
55000
- 12000 12000
55000
Balance3
43000 12000- 4480 5600
55000+ 1120
Balance4
43000 7520+ 7500
5600 561207500
Balance5
43000+ 1250
15020- 1000
5600 56120+ 250
7500
Balance6
44250 14020- 150
5600 56370 7500- 150
Balance7
44250 13870+ 2500
5600 56370 7350+ 2500
Balance8
44250 16370- 100
5600 56370- 100
9850
Balance9
44250- 250
16270 5600 56270- 250
9850
Balance 44000 16270 5600 56020 9850GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
22/26
ILLUSTRATION # 5
Following are the transaction of Mr. Nazeef & Co.1. Introduce cash as capital $ 20000
2. Purchase merchandise for cash $ 5000.
3. Purchase computer for cash $ 10000.
4. Merchandise costing $ 1400. sold to Ahmad for $ 1800.5. Purchase merchandise from Akbar for $ 500.
6. Received $ 1000, from Ahmad.
7. Sold merchandise for cash $ 800. which cost $ 750.
8. Paid salaries $ 400.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
23/26
ASSETS = EQUITIES
S.No CASH MerchandiseInventory
Computer AccountReceivable
CAPITAL AccountPayable
1
2
20000
- 5000 5000
20000
Balance3
15000- 10000
5000 10000
Balance4
5000 5000- 1400
100001800
20000+ 400
Balance5
5000 3600+ 500
10000 1800 20400500
Balance6
5000+ 1000
4100 10000 1800- 1000
20400 500
Balance
7
6000
+ 800
4100
- 750
10000 800 20400
+ 50
500
Balance8
6800- 400
3350 10000 800 20450-400
500
Balance 6400 3350 10000 800 20050 500
Totals 20550 = 20550
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
24/26
To be sold by students
Q # 1 Mr. Naseer started business with Cash Rs. 10000, andFurniture Rs. 2000. His other transaction were as follows,
1. Purchase merchandise on account Rs. 5000.
2. Purchase equipment for cash Rs. 5000.
3. Sold merchandise costing Rs. 5000, for Rs. 8000, on credit.4. Received cash against Account Receivable Rs. 5000.
5. Payment to creditor in full settlement of account Rs. 4900.
6. Rs. 500, was privately used by Mr. Naseer.
7. Paid salary for the month Rs. 500.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
25/26
Q # 2Show the effect of the following transaction on assets, liabilities
and owner equities,
1. Introduce cash by owner Rs. 60000.
2. Purchase merchandise on account from Yasir for Rs. 3500.
3. Sold merchandise to Ali for Rs. 1500 (cost Rs.1000)
4. Paid advertisement expenses Rs. 1000.
5. Sold merchandise for cash for Rs. 1400, cost Rs. 1500.
6. Merchandise given as charity Rs. 150.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
7/29/2019 Chapter # 2. Acc
26/26
.
GUL NAWAZINSTITUTE OF SUSTAINABLE DEVELOPMENT &TECHNOLOGY
Top Related