Accounting Basics Fundamental Accounting Concepts

The Accounting Equation: More Examples

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To help you better understand how the accounting equation works and stays in balance, here are
more sample transactions and their effects to the accounting equation.

In addition to transactions 1, 2 and 3 in the previous lesson, assume the following data:

4. Rendered services and received the full amount in cash, $500

5. Rendered services on account, $750
6. Purchased office supplies on account, $200
7. Had some equipment repaired for $400, to be paid after 15 days
8. Mr. Alex, the owner, withdrew $5,000 cash for personal use
9. Paid one-third of the loan obtained in transaction #2
10. Received customer payment from services in transaction #5

The transactions will result to the following effects:

Transaction Assets = Liabilities + Capital

1. Owner's investment 20,000.00 = + 20,000.00
2. Loan from bank 30,000.00 = 30,000.00 +
1,000.00
3. Purchased printers = +
(1,000.00)
4. Service revenue for cash 500.00 = + 500.00
5. Service revenue on account 750.00 = + 750.00
6. Supplies on account 200.00 = 200.00 +
7. Repair of equipment = 400.00 + (400.00)
8. Owner's withdrawal (5,000.00) = + (5,000.00)
9. Payment of loan (10,000.00) = (10,000.00) +
750.00
10. Collection of accounts = +
(750.00)
Balance 36,450.00 = 20,600.00 + 15,850.00

Examples Explained
4. The company received cash for services rendered. Cash increased thereby increasing
assets. At the same time, capital is increased as a result of the income (Service Revenue).
As we've mentioned in the Accounting Elements lesson, income increases capital.
5. The company rendered services on account. The services have been rendered, hence,
already earned. Thus, the $750 worth of services rendered is considered income even if
 the amount has not yet been collected. Since the amount is still to be collected, it is
recorded as Accounts Receivable, an asset account.
6. Office supplies worth $200 were acquired. This increases the company's Office Supplies,
part of the company's assets. The purchase results in an obligation to pay the supplier;
thus a $200 increase in liability (Accounts Payable).
7. The company incurred in $400 Repairs Expense. Expenses decrease capital. The amount
has not yet been paid. Thus, it results in an increase in total liabilities.
8. The owner withdrew $5,000 cash. Cash is decreased thereby decreasing total assets.
Withdrawals or drawings decrease capital.
9. One-third of the $30,000 loan was paid. Therefore, Cash is decreased by $10,000 due to
the payment. Liabilities are also decreased by the amount paid.
10. The $750 account in a previous transaction has been collected. Therefore, the Accounts
Receivable account is decreased and Cash is increased.

Notice that every transaction results in an equal effect to assets and liabilities plus capital. The
beginning balances are equal. The changes arising from the transactions are equal. Therefore, the
ending balances would still be equal.

The balance of the total assets after considering all the above transactions amounts to $36,450. It
is equal to the combined balances of total liabilities at $20,600 and capital at $15,850 (total of
$36,450).

Assets = Liabilities + Capital is a mathematical equation. Using your skills in algebra, the
formula can be rewritten to get other versions of the equation.

 Liabilities = Assets - Capital

 Capital = Assets - Liabilities








 Fundamental Accounting Equation:
Problems and Solutions
No. Problems & Solutions
01. Show that the accounting equation is satisfied after taking into consideration
each of the following transactions in the books of Mr. N

a. Started business with capital Rs. 1,00,000

b. Bought furniture Rs. 25,000 • Basic
c. Bought goods for cash Rs. 20,000 Accounti
d. Bought goods from Ram on Credit Rs. 5,000 ng
e. Sold goods for cash for Rs. 15,000 Process
f. Sold goods to Shyam on credit Rs. 8,000 •
g. Paid cash to Ram Rs. 4,000 Consignm
h. Received cash from Shyam Rs. 5,000 ent
i. Paid Cash into Bank Rs. 25,000 Accounti
j. Withdrawn from bank Rs. 10,000 ng
• Bank
Reconcili
Solution ation
Statement
•
» Partnershi
(a) Capital + Liabilities = Assets p
Accounts
1,00,000 + 0 = Cash (1,00,000) • Final
(b) Capital + Liabilities = Accounts
Assets
1,00,000 + 0 = Cash (75,000) + Furniture (25,000)
(c) Capital + Liabilities = Assets
Cash (55,000) + Furniture (25,000) + Goods
1,00,000 + 0 =
(20,000)
(d) Capital + Liabilities = Assets
Ram Cash (55,000) + Furniture (25,000) +
1,00,000 + =
(5,000) Goods(25,000)
(e) Capital + Liabilities = Assets
• Process
Ram Cash (70,000) + Furniture(25,000) + Costing
1,00,000 + =
(5,000) Goods(10,000) •
(f) Capital + Liabilities = Standard
Assets
Costing
Ram Cash (70,000) + Furniture (25,000) + Goods (Variance
1,00,000 + =
(5,000) (2,000) + Shyam (8,000) Analysis)
• Funds
(g) Capital + Liabilities = Assets Flow
Ram Cash (66,000) + Furniture (25,000) + Goods Cash
1,00,000 + = Flow
(1,000) (2,000) + Shyam (8,000)
(h) Capital + Liabilities = Assets •
Ram Cash (71,000) + Furniture (25,000) + Goods Permutati
1,00,000 + = ons
(1,000) (2,000) + Shyam (3,000)
Combinat
(i) Capital + Liabilities = Assets ions
•
1,00,000 + Ram = Cash (46,000) + Furniture (25,000) + Goods Probabilit
(1,000) (2,000) + Shyam (3,000) + Bank (25,000) y
(j) • Theory
Capital + Liabilities = Assets
of
1,00,000 + Ram = Cash (56,000) + Furniture (25,000) + Goods Expectati
(1,000) (2,000) + Shyam (3,000) + Bank (15,000) on
(Random
No. Problems & Solutions Variable)
02. Following are the accounting transactions relating to Mr. P's business. Use
the accounting equation to show their effect on his assets, liabilities and
capital. • CA CPT
a. Commenced business with a Capital of Rs. 50,000 • CA PE-
b. Bought Machinery for cash Rs. 10,000 II
c. Purchased goods for cash Rs. 15,000 • CA PCC
d. Purchased goods from A on credit Rs. 5,000 • CA
e. Sold goods for cash Rs. 10,000 Final
f. Paid to A Rs. 2,000 • CWA
g. Sold goods to B on credit Rs. 3,000 Foundatio
h. Paid into Bank Rs. 6,000 n
i. Paid to A by cheque Rs. 1,000 • CWA
j. Received from B a cheque for Rs. 2,000 Inter
• CWA
Final
Solution • CS
Foundatio
» n
(a) Capital + Liabilities = • CS Inter
Assets • CS Final
50,000 + 0 = Cash (50,000)
(b) Capital + Liabilities = Assets
50,000 + 0 = Cash (40,000) + Machinery (10,000)
(c) Capital + Liabilities = Assets
Cash (25,000) + Machinery (10,000) + Goods
50,000 + 0 =
(15,000)
(d) Capital + Liabilities = Assets
Cash (25,000) + Machinery (10,000) + Goods
50,000 + A (5,000) =
(20,000)
(e) Capital + Liabilities = Assets
Cash (35,000) + Machinery (10,000) + Goods
50,000 + A (5,000) =
(10,000)
(f) Capital + Liabilities = Assets
Cash (33,000) + Machinery (10,000) + Goods
50,000 + A (3,000) =
(10,000)
(g) Capital + Liabilities = Assets
Cash (33,000) + Machinery(10,000) + Goods
50,000 + A (3,000) =
(7,000) + B (3,000)
(h) Capital + Liabilities = Assets
50,000 + A (3,000) = Cash (27,000) + Machinery (10,000) + Goods
(7,000) + B (3,000) + Bank (6,000)
(i) Capital + Liabilities = Assets
50,000 + A (2,000) = Cash (27,000) + Machinery (10,000) + Goods
(7,000) + B (3,000) + Bank (5,000)
(j) Capital + Liabilities = Assets
50,000 + A (2,000) = Cash (27,000) + Machinery (10,000) + Goods
(7,000) + B (1,000) + Bank (7,000)

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Accounting equation is the base of accounting. If you are new in learning of accounting you
should learn accounting equation example. With this accounting equation example, you can
clear your fundamentals in accounting. Accounting equation means that equation which tells us
that assets will always be equal to the liabilities. These liabilities are of creditor's liability and
owner's liability. This equation will always same in every transaction. First we explain its
formula and then we prove it with example.

Formula of Accounting Equation

A=L

Total Assets = Total Liabilities

or

Total Assets = Total Outside liabilities + total owner's liabilities

or

Total Assets = Total creditor's equity + total owner's equity

or

Total Assets = Total creditor's equity + ( Owner's capital + total incomes - total expenses)

Accounting Equation Example

1. Mohan commenced business with cash $ 30000

(A) Business of Mohan receives cash as asset, Cash asset will be $ 30000

(B) Mohan gives this cash in the form of capital = Owner's equity will be $ 30000
Total Assets = Total Liabilities + Total Capital
Total Liabilities Nil
Cash 30000
Capital 30000

30000 30000

2. Mohan Purchased furniture for cash $ 10000

(A) When we bought furniture with cash, our cash will decrease with $ 10000. It means one asset
will decrease.

(B) Our furniture asset will increase in business, so we add $ 10000 as furniture asset. There will
no effect on liability side of accounting equation.

Total Assets = Total Liabilities + Total Capital

Cash 30000
Total Liabilities Nil
Less payment for furniture -10000
Capital 30000

Furniture 20000
+10000

30000 30000

3. Mohan Purchased Goods from Sham on credit of $ 5000

(A) With this there will no effect on cash but new goods asset will increase. This is called
inventory or stock asset. So, we will show more $ 5000 in asset side of accounting equation.

( B) With we have to pay to sham $ 5000, so he is our creditor. This will increase our liability.

Total Assets = Total Liabilities + Total Capital

Cash 20000 Liability
+5000
Furniture 10000 Creditor
30000
Inventory +5000 Capital

35000 35000

4. Mohan Sold goods (Cost $ 1000) at $ 2000 on credit to Sohan

(A) Inventory asset will decrease (cost $ 1000)

( B) We have to get money of $ 2000. So, account receivable will increase with $ 2000.

(C) By this dealing we gained $ 1000. So, this will increase our initial capital.

Total Assets = Total Liabilities + Total Capital

Cash Furniture 2000010000
LiabilityCreditor +5000
Inventory +5000
Capital 30000
Less Sold Stock (Cost) - 1000
Add Profit on sale + 1000
Debtor 2000

36000 36000

5. Mohan sold goods ( Cost $ 3000) at $ 2000 with cash

(A) Inventory asset will decrease with cost $ 3000

(B) Cash will increase with sale of $ 2000 goods.

(C) Capital will decrease with the loss of $ 1000

Total Assets = Total Liabilities + Total Capital

20000 +
Cash + cash sale Furniture
200010000 LiabilityCreditor +5000
Inventory
+4000 Capital 31000
Less Sold Stock (Cost)
- 3000 Less loss on sale -1000
Debtor
2000

35000 35000

6. Mohan has to pay rent to landlord $ 1000 but not yet paid.

(A) Liability of rent will increase with $ 1000

(B) Capital will decrease due to expense of business with $ 1000

Total Assets = Total Liabilities + Total Capital

 LiabilityCreditor
+5000 +
Cash Furniture 22000 10000 O/s Rent
1000
Inventory +1000 Capital
30000
Debtor 2000 Less rent
-1000
expense

35000 35000

7. Mohan has to receive commission of $ 1000 but not yet received.

(A) Our asset of receivable commission will increase because we have to get $ 1000.

(B) Our capital will increase with $ 1000 because this commission is our income. Income always
increases capital.

Total Assets = Total Liabilities + Total Capital

LiabilityCreditor
Cash Furniture 22000 10000 +5000 +
O/s Rent
Inventory +1000 1000
Capital
Debtor 2000 29000
Add commission
Commission Receivables +1000 +1000
income

36000 36000

8. Mohan has received advance fees $ 6000 from client before providing service to him.

(A) This advance fees of $ 6000 will our liability. Because if we will not complete our service,
other person has to get money from us.

(B) Cash will increase with $ 6000

Total Assets = Total Liabilities + Total Capital

Cash + cash of advance 22000 + LiabilityCreditor +5000 +
fee Furniture 600010000 O/s Rent 1000
Inventory +1000 Advance Fees + 6000
Debtor 2000 Capital 30000
Commission Receivables +1000
 42000 42000

9. Mohan has paid advance insurance of $ 7000 before due date.

(A) Cash will decrease with $ 7000

(B) A new asset of advance insurance will create with $ 7000 because we has right to get back
same amount before due date of premium of insurance.

Total Assets = Total Liabilities + Total Capital

Cash - payment of
advance 28000 -
LiabilityCreditor
insuranceFurniture 700010000 +5000 +
O/s Rent
Inventory +1000 1000
Advance Fees
Debtor 2000 + 6000
Capital
Commission Receivables +1000 30000
Advance Insurance + 7000
Payment

42000 42000

10. Mohan purchased Computer of $ 3000 with business cash for personal use.

(A) Cash will decrease $ 3000 for payment for buying computer.

(B) Capital will decrease because he withdraws money for personal use. No, business will get
power for not paying $ 3000 capital in future to businessman Mohan.

Total Assets = Total Liabilities + Total Capital

Cash - payment for LiabilityCreditor
+5000 +
computer for personal 21000 - O/s Rent
1000
useFurniture 300010000 Advance Fees
+ 6000
Inventory +1000 Capital
30000
Debtor 2000 Less Drawing
- 3000
Commission Receivables +1000 ( Purchasing of
Advance Insurance + 7000 computer for
Payment personal use)
39000 39000