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Accounting equation
The whole Financial Accounting depends on Accounting Equation which is also known as Balance Sheet Equation. The basic Accounting Equation is:
Assets = Liabilities + Owner’s equity
or A = L + P
or P = A - L
or L = A - P
Where A = Assets, L = Liabilities, P = Capital
While trying to do this correlation, please note that incomes or gains will increase owner’s equity and expenses or losses will reduce it.
Please go through the following illustration to understand this equation properly.
Prepare an Accounting Equation from the following transactions in the books of Mr. X for Jan, 2018.
1 Invested Capital in the firm ` 20,000
2 Purchased goods on credit from Das & Co. for ` 2,000
4 Bought plant for cash ` 8,000
8 Purchased goods for cash ` 4,000
12 Sold goods for cash (cost ` 4,000 + Profit ` 2,000) ` 6,000.
18 Paid to Das & Co. in cash ` 1,000
22 Received from B. Banerjee ` 300
25 Paid salary ` 6,000
30 Received interest ` 5,000
31 Paid wages ` 3,000
Solution:
Effect of transaction on Assets, Liabilities and Capital
Date |
Transaction |
Assets = |
Liabilities + |
Capital |
January, 2018
1 |
Invested Capital in the firm |
20,000 |
-- |
20,000 |
2 |
Purchased goods on credit from Das & Co. |
+2,000 |
+2,000 |
+2,000 |
|
Revised Equation |
22,000= |
2,000+ |
20,000 |
4 |
Bought Plant for cash 8,000 |
+8,000
-8,000 |
-- |
-- |
|
Revised Equation |
22,000= |
2,000+ |
20,000 |
8 |
Purchased goods for cash 4,000 |
+4000
- 4000 |
-- |
-- |
|
Revised Equation |
22,000= |
2,000+ |
20,000 |
12 |
Sold Goods for cash (Cost 4,000 + Profit 2,000) |
+6,000
-4,000 |
-- |
+2,000 |
|
Revised Equation |
24,000 |
2,000+ |
22,000 |
18 |
Paid to Das & Co. for 1,000 |
-1,000 |
-1,000 |
-- |
|
Revised Equation |
23,000= |
1,000+ |
22,000 |
22 |
Received from B.Banerjee for 300 |
+300
-300 |
|
|
|
Revised Equation |
23,000= |
1,000+ |
22,000 |
25 |
Paid salary for 6,000 |
- 6,000 |
|
-6,000 |
|
Revised Equation |
17,000= |
1,000+ |
16,000 |
30 |
Received Interest for 5,000 |
+5,000 |
-- |
+5,000 |
|
Revised Equation |
22,000= |
1,000+ |
21,000 |
31 |
Paid Wages for 3,000 |
-3,000 |
|
-3,000 |
|
Revised Equation |
19,000= |
1,000+ |
18,000 |
|
