Question

How to solve accounting equation in double entry system?

Answer 1

An accounting equation builds the foundation for all accounting system. The double entry accounting system is based on basic accounting equation only. A simple accounting equation illustrates two simple facts about a company: what it owns and what it owes.

Let us first understand the elements of an accounting equation. The financial position of a company is measured in the following terms:

Assets (what it owns) (for example, cash, accounts receivable, inventory, prepaid insurance, and investments)Liabilities (what it owes to others) (notes or loans payable, account payable, salaries and wages payable and interest payable)Capital (the difference between assets and liabilities)

How to solve a basic accounting equation?

Here is one example using the above formula.

Problem: Find out how accounting equation is satisfied after taking into consideration each of the following transactions in the books of Mr. AStarted business with capital $100,000

Solution

Capital (100,000) + Liabilities (0) = Assets (cash = 100,000)

Bought furniture $25, 000

Solution

Capital (100,000) + Liabilities (0) = Assets (Cash = 75,000 + Furniture = 25,000)

Bought goods for cash $20, 000

Solution

Capital (100, 000) + Liabilities (0) = Assets (Cash = 55,000 + Furniture = 25,000 + Goods = 20,000)

Brought goods from Mr. Nelson on credit $5,000

Solution

Capital (100, 000) + Liabilities (Nelson = 5,000) = Assets (Cash = 55,000 + Furniture = 25,000 + Goods = 25,000)

Sold goods for cash for $15, 000

Capital (100,000) + Liabilities (Nelson = 5,000) = Assets (Cash = 70,000 + Furniture = 25,000 + Goods = 10,000)