4 5. Prepare an Accounting Equation from the following transactions in the books of Mr X for November, 2020:- 1 Invested Capital in the firm 20,000 2. Purchased goods on credit from Das & Co for 2,000 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 salaries 6,000 30 Received interests 5,000 31 Paid wages 3,000
Answers
Answer:
Accounting is based on the principle of two-sided. In order to carry out business activities, the company needs funds; these funds must be given to the company by someone. The funds owned by the company are called assets. Part of these assets is provided by the owner, total amount of funds contributed by him is called owner’s equity or capital. If the owner is the only one who contributed, then the equation A = O.E will be fair. (assets equal to capital).
However, the assets may be contributed by someone else who is not the owner. The debt of the enterprise for these assets is called liabilities. Therefore, now the equation will take the following form: A = L + O.E. (Assets equal equity plus liabilities). The left and right sides of the equation always coincide.
Assets= Liabilities + Owner’s Equity
The equality of both parts of the equation is always maintained. For deep understanding of accounting equation, following are important accounting equation questions:
Problem 1:
Habib Ullah Sadiq is wholesale trader; following transactions are record in Accounting Equation?
i. Commence business with cash Rs. 200,000 and Land Rs. 50,000.
ii. Bought merchandising for cash Rs. 80,000.
iii. Cash sales of worth Rs. 25,000.
iv. Bought goods on credit from Salman of worth Rs. 50,000.
v. Sales on account to Ali Raza Rs. 12,000.
vi. Purchase furniture of the value of Rs. 5,000 by cash.
vii. Received cash form Ali Raza of Rs. 10,000.
viii. Return defective furniture of worth Rs. 1,500.
xi. Paid wages Rs. 1,000, Rent 2,000 and Electricity Bill Payable Rs. 1,500.
Explanation:
Purchased goods on credit from Das & Co for 2,000 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