Worked Example No.2 On Accounting Equation

Refresh your understanding on Debit And Credit Rules/Double Entry/Accounting Equation &
The Accounting Equation in relationship to the Balance Sheet

Worked Examples on Accounting Equation:

Question No 1: Fill In The Blank for the following:

1.0	Assets	Liabilties	Capital
a	40,000	10,000	?
b	15,000	?	11,000
c	?	5,000	10,000
d	11,000	8,000

Answer:

1a $30,000 ($40,000-$10,000)

1b $4,000 ($15,000-$11,000)

1c $15,000 ($5,000+$10,000)

1d $3,000 ($11,000-$8,000)

Question No. 2

The following is the summary data of ABC Ltd for August presented in equation form. Describe each of the transactions that occurred during August.

2.0	ASSET Cash	ASSETS Supplies	ASSETS Equipment	= LIABILITIES	+
a	+$10,000				+$10,000	Capital
b	-$2,000		+$2,000
c	-$200	+$200
d			+$700	$700
e	+$1,000				+$1,000	Income
f	-$600				-$600	Salaries
g	-$300			-$300
h	-$100				-$100	Drawing
	$7,800	$200	$2,700	= $400 +	$10,300

Answer:

2a The owner made an investment by injecting cash as capital

2b Equipment was bought and paid for

2c Supplies were bought and paid for

2d Additional equipment was bought on account creating a liability

2e The company recorded an income for work done for customers

2f The company paid salaries to the workers

2g Cash was paid to reduce amount owing to Accounts Payable(Liability)

2h Owner withdrew cash for her personal use.

Worked Example No 1(WE1):Accounting Equation

Refresh your understanding on Debit And Credit Rules/Double Entry/Accounting Equation &
The Accounting Equation in relationship to the Balance Sheet

Worked Examples on Accounting Equation:

1.0 What effect do the following transactions have on owner's equity(capital)?
(a) The owner invested $100,000 into the business
(b) She bought equipemnt on accounts,$30,000
(c) She paid part of the bill owed to the creditors
(d) She received $30,000 as fees
(e) She paid salaries for the month $10,000
(f) She withdrew $12,000 from the business
(g) She paid rent for the month $3,000
(h) Inventory of supplies increased $5,000 during the month



Answers to the above question on Increase/(Decrease) on owner's equity(capital)
1.0
(a) Increase (b) No effect (c) No effect (d) Increase (e) Decrease (f) Decrease
(g) Decrease (h) Decrease

_____________________________________________________


2.0 Fill in the blank:
(a) The accounting equation is ______=______+______
(b) Income increases net assets and also ________
(c) A withdrawal of cash reduces cash and _______
(d) An investment in the business increases______ & ______
(e) The difference between assets and liabilities is _________
(f) Money owed by an outsider is an _________
(g) Items owned by a business that have money value are known as ______
(h) If you buy "on account", we create a __________


Answer to filling in the blank for Question 2
(a) assets, liabilities,capital (b) capital (c) capital (d) assets, capital
(e) capital (f) asset (g) assets (h) liability

Accounting Equation And Its Relations With The Balance Sheet

Click here for WORKED EXAMPLE On Accounting Equation


This article explains what is accounting equation and its components and how the accounting equation relates to the Balance Sheet.

• The accounting equation is based on the business entity concept which assumes that the business, as a unit by itself, acquires its own assets through funds supplied by the owner or by external sources.

• The accounting equation =Assets=Owner’s Equity + Liabilities

• Assets are items of value owned by the business

• Liabilities are amounts owed by a business to external parties.

• Owner’s equity is the owner’s interest or claim on the business

• Owner’s Equity=Assets-Liabilities

• Owner’s equity can be increased through investment by the owner or as a result of profit earned from business operations

• Owner’s equity can be decreased through withdrawals by the owner for personal use or as a result of losses made from business operations.

The relationships between the accounting equation and the balance sheet:-

• The Balance Sheet is a statement listing all assets, owners’s equity and liabilities AT A PARTICULAR DATE
• The balance sheet totals WILL ALWAYS BALANCE because the assets will always be equal to owner’s equity plus liabilities

• The accounting equation and the Balance Sheet are two different ways of expressing the same idea.

• The equality of the accounting equation and the balance sheet totals are always maintained no matter what transactions take place in the business