Lecture 3 Accounting Equation

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Accounting

Equation
Mr. Atif Iftikhar
http://www.free-powerpoint-templates-design.com
Agenda 01 Accounting Equation

02 Basic Terminologies

03 Solved Examples

04 Challenge
Accounting equation
Users of Accounting
rules Information
Every Transaction have at least two Impact

Basic Accounting Equation is

Assets= Liabilities + Capital

All Expenses/Losses are deducted from the Capital

All income/Gains Added Back to Capital

Adjustments in Capital will be made for current year only


Example
The statement of financial
position/ Balance Sheet

The Statement of Financial Position (or Balance Sheet) is a list that shows three main
things about a company at a certain time:

Assets – What the company has (like cash, equipment, or products).


Liabilities – What the company needs to pay (like loans or bills).

Owner's Equity – The amount that belongs to the owners after paying for everything .
The statement of financial
position/ Balance Sheet
Solution
Example
NevTech Traders started the year with $100,000 in assets, $40,000 in
liabilities, and $60,000 in owner's equity. Below are the business
transactions that occurred during the month of January:

1. The company bought office furniture worth $10,000, paid half in cash
and the rest on credit.
2. NevTech Traders received $5,000 in cash from a customer for a service
provided.(Revenue)
3. They paid off $3,000 of their existing loan.
4. The owner invested an additional $15,000 into the business.
5. NevTech Traders made a sale of $8,000 on credit.(Revenue)
6. The company paid $2,000 in cash for utility bills.
Example
Show the effect of the following transactions upon the accounting
equation:

1. Mr. Babar invested Rs.110,000 in cash.


2. He purchased goods for cash Rs. 22,000 and credit Rs.18,000
3. He made additional investment in cash Rs. 20,000.
4. Cash Paid to Creditors Rs.10,000.
5. He purchased refrigerator for personal use Rs.15,000
6. He Paid rent Rs. 2000.
Transaction Assets Liabilities + Capital

Cash Goods A/P Capital


1 110,000 110,000
closing 110,000 110,000

2 -22,000 40,000 18,000


closing 88,000 40,000 18,000 110,000

3 20,000 20,000
closing 108,000 40,000 18,000 130,000

4 -10,000 -10,000
closing 98,000 40,000 8,000 130,000

5 -15,000 -15,000
closing 83,000 40,000 8,000 115,000

6 -2000 -2000
closing 81,000 40,000 8,000 113,000
Total 121,000 121,000
Example
Show the effect of the following transactions upon the accounting
equation and Make Balance Sheet:

1. Mr. Noman Started business with Rs.100,000 in cash.


2. He purchased goods for cash Rs. 50,000
3. He purchased goods of Rs. 20,000 on credit.
4. Sold half of the goods for cash
5. Goods of Rs. 10,000 sold on credit
6. Paid Rs. 10,000 to creditor(Trade Payables)
7. Rent paid Rs. 25,000
8. Commission Received Rs.10,000
Transaction Assets Liabilities + Capital

Cash Goods A/R A/P Capital

1 100,000 100,000

closing 100,000 100,000

2 -50,000 50,000
closing 50,000 50,000 100,000

3 20,000 20,000
closing 50,000 70,000 20,000 100,000

4 35,000 -35,000
closing 85,000 35,000 20,000 100,000
5 -10,000 10,000
closing 85,000 25,000 10,000 20,000 100,000

6 -10,000 -10,000
closing 75,000 25,000 10,000 10,000 100,000
7 -25,000 -25,000
closing 50,000 25,000 10,000 10,000 75,000
8 -10,000 -10,000
closing 40,000 25,000 10,000 10,000 65,000
Total 75,000 75,000
Example
On 1st Jan 2024 the balance of Mr. Khan Bros are as follows:

Assets Liabilities + Capital


Cash Rs. 25,000 Capital Rs.134,000

Account Receivable/ Rs. 17,000


Trade Receivables

Stock of goods Rs. 22,000


Machinery Rs. 70,000

Rs. 134,000 Rs. 134,000


Example
Transactions during the month of January are as follows

Jan 1. Purchased goods for cash Rs. 4,000 subject to a trade discount of
10%.
Jan 5. sold goods for cash Rs. 12,000 costing Rs. 10,500.
Jan 15. Goods sold on credit Rs. 5000 costing Rs. 4000.
Jan 18. Goods returned by customer Rs. 2000 costing Rs. 1,900.
Jan 24. Cash received from debtor(Trade Receivables) Rs. 14,000.
Jan 30. Depreciation on machine Rs. 1,400.
Transaction Assets Liabilities + Capital
Stock of
Cash A/R Machinery Capital
Goods
25,000 22,000 17,000 70,000 134,000

Jan 1st -3,600 3,600


closing 21,400 25,600 17,000 70,000 134,000
Jan 5th 12,000 -10,500 1,500
closing 33,400 15,100 17,000 70,000 135,500

Jan-15 -4,000 5000 1,000


closing 33,400 11,100 22,000 70,000 136,500
Jan-18 1,900 -2,000 -100
closing 33,400 13,000 20,000 70,000 136,400

Jan-24 14,000 -14,000


closing 47,400 13,000 6,000 70,000 136,400

Jan-30 (1,400) -1,400


closing 47,400 13,000 6,000 68,600 135,000

Total 135,000 135,000


THANK YOU

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