Accounting Equation

Assets = Capital + Liabilities

Examples:

Transaction 1. Business Leader commenced his business with cash $. 50,000. This is an
example of investment in the business by the owner. The effect of this transaction on the
accounting equation is that asset is increased by $. 50,000 and the capital is also
increased by the same.

Transaction 2. Purchased furniture on cash $. 10,000. This transaction affected the

accounting equation as the increase in the one new asset Furniture and decrease in asset
cash with the same amount.

Transaction 3. Purchased merchandise (goods) for resale and paid cash $. 10,000. This is
an example of cash purchase of an asset. This transaction affected the accounting
equation as the increase of asset merchandise and decrease in the asset cash will the
same.

Transaction 4. Purchased Merchandise $. 5,000 on credit. The effect of the transaction

that the asset merchandise increased by $. 5,000 and a liability is created in the same
amount. This liability is known as Creditors/Payable. This transaction brings about a
change on both sides of the equation.

Transaction 5. Sold merchandise for cash $. 2,000 which cost $. 1,500. The cost of
merchandise sold was $. 1,500 and it was sold for $. 2,000. There is profit of amount $.
500. Profit belongs to the owners therefore; proprietorship will be increased by the
amount of profit. The effect of this transaction is, therefore, a decrease in merchandise to
the extent of the cost. $. 1,500, an increase in of $. 2,000 in cash, and an increase in
proprietorship to the extent of the profit $. 500.

Transaction 6. Sold merchandise on credit for $. 4,000 which cost $. 3,000. This
transaction affected the equation increase in one new asset, Debtors/Account receivable
with $. 4,000 and decrease in merchandise at cost $. 3,000 and increase in capital by
profit of $. 1,000.

Transaction 7. Paid $. 1,000 cash to in Part payment of the cost of good purchased earlier
on credit. The payment of cash results in the decrease of asset cash and liability
(creditors) with the same amount.

Transaction 8. Received cash from account receivable $. 1,000 to whom a sale on credit
was made earlier. This is an example of collection from debtors. This transaction is an
exchange of one asset for another. The effect is on one side of the equation.

Transaction 9. Business Leaders paid dividend $. 1,000 in cash. This transaction affected
the equation by decrease in cash asset and decrease in capital.
Solution:

ASSETS = LIABILITIES + CAPITAL

Cash + Furniture + Goods + Debtor = Creditors Capital
+50,000 = 50,000
1
50,000 = 50,000
2
-10,000 + 10,000
40,000 + 10,000 = 50,000
3
-10,000 + 10,000
30,000 + 10,000 + 10,000 = 50,000
4
+ 5,000 + 5,000
30,000 + 10,000 + 15,000 = 5,000 50,000
5
+2,000 - 1,500 + 500
32,000 + 10,000 + 13,500 = 5,000 50,500
6
- 3,000 + 4,000 +1,000
32,000 + 10,000 + 10,500 + 4,000 = 5,000 51,500
7
-1,000 -1,000
31,000 + 10,000 + 10,500 + 4,000 = 4,000 51,500
8
+1,000 - 1,000
32,000 + 10,000 + 10,500 + 3,000 = 4,000 51,500
9
-1,000 -1,000
31,000 + 10,000 + 10,500 + 3,000 = 4,000 + 50,500

(Accounting Equation)
1.
Prove that the accounting equation is satisfied in all the following transactions taken
place by Business Leader Company.

1. Commenced business with cash $. 600,000

2. Purchase goods for cash $. 30,000 and credit $. 20,000
3. Sold goods for cash $. 30,000; costing $. 20,000
4. Purchase machinery $. 100,000
5. Paid salaries $. 500
6. One of the owner withdrawn cash of amount $. 5,000 and bought Motor Vehicle
for his personal use.

2.

1. Commenced business with cash $. 50,000

2. Purchased goods for Cash $. 20,000 and Credit $. 30,000
3. Sold goods for Cash $. 40,000 costing $. 30,000
4. Rent paid $. 500
5. Bought furniture $. 5,000 on credit
6. Bought Equipment for personal use $. 5,000
7. Purchased building for cash $. 20,000

Required: Use accounting equating to show the effect of the above transaction on the
assets, liabilities and capital of Business Leader Company.