Accounting Equation Example

Accounting equation is the base of accounting. If you are new in learning of accounting you should learn accounting equation example. With this accounting equation example, you can clear your fundamentals in accounting. Accounting equation means that equation which tells us that assets will always be equal to the liabilities. These liabilities are of creditor's liability and owner's liability. This equation will always same in every transaction. First we explain its formula and then we prove it with example.

Formula of Accounting Equation


A = L


Total Assets = Total Liabilities 


or 


Total Assets = Total Outside liabilities + total owner's liabilities 


or 


Total Assets = Total creditor's equity + total owner's equity


 or 


Total Assets = Total creditor's equity + ( Owner's capital + total incomes - total expenses) 


 Accounting Equation Example 




1. Mohan commenced business with cash $ 30000


(A) Business of Mohan receives cash as asset, Cash asset  will be $ 30000


(B) Mohan gives this cash in the form of capital = Owner's equity will be $ 30000

     
 Total Assets                                  =   Total Liabilities + Total Capital
Cash  30000 Total Liabilities
Capital
 Nil
30000
3000030000

2. Mohan Purchased furniture for cash  $ 10000

(A) When we bought furniture with cash, our cash will decrease with $ 10000. It means one asset will decrease.

(B) Our furniture asset will increase in business, so we add $ 10000 as furniture asset. There will no effect on liability side of accounting equation.

Total Assets                           =   Total Liabilities + Total Capital
Cash
Less payment for furniture


Furniture
 30000
-10000
 Total Liabilities
Capital


 Nil
30000


  20000
+10000
30000 30000

3. Mohan Purchased Goods from Sham on credit of $ 5000

(A) With this there will no effect on cash but new goods asset will increase. This is called inventory or stock asset. So, we will show more $ 5000 in asset side of accounting equation. 

( B) With we have to pay to sham $ 5000, so he is our creditor. This will increase our liability. 


Total Assets                        =   Total Liabilities + Total Capital
Cash
Furniture
Inventory
20000
10000
+5000
Liability
Creditor
Capital
+5000
30000
3500035000

4. Mohan Sold goods (Cost $ 1000) at $ 2000 on credit to Sohan 

(A) Inventory asset will decrease (cost $ 1000)

( B) We have to get money of $ 2000. So, account receivable will increase with $ 2000.

(C) By this dealing we gained $ 1000. So, this will increase our initial capital.


                    Total Assets          =   Total Liabilities + Total Capital
Cash Furniture
Inventory
Less Sold Stock (Cost)
Debtor
2000010000
+5000
- 1000
  2000
LiabilityCreditor
Capital
Add Profit on sale
 +5000  30000
 + 1000
36000 36000


5. Mohan sold goods ( Cost $ 3000) at $ 2000 with cash

(A) Inventory asset will decrease with cost $ 3000

(B) Cash will increase with sale of $ 2000 goods.

(C) Capital will decrease with the loss of $ 1000


                    Total Assets          =   Total Liabilities + Total Capital
Cash + cash sale Furniture
Inventory
Less Sold Stock (Cost)
Debtor
20000 + 200010000
+4000
- 3000
2000
LiabilityCreditor
Capital
Less loss on sale
+5000 31000
 -1000
35000 35000


6. Mohan has to pay rent to landlord $ 1000 but not yet paid.

(A) Liability of rent will increase with $ 1000

(B) Capital will decrease due to expense of business with $ 1000


                    Total Assets          =   Total Liabilities + Total Capital
Cash  Furniture
Inventory
Debtor
22000 10000
+1000
2000
LiabilityCreditor
O/s Rent
Capital
Less  rent expense 
+5000 + 1000
30000
 -1000
35000 35000



7. Mohan has to receive commission of $ 1000 but not yet received.

(A) Our asset  of receivable commission will increase because we have to get $ 1000.

(B) Our capital will increase with $ 1000 because this commission is our income. Income always increases capital.


                    Total Assets          =   Total Liabilities + Total Capital
Cash  Furniture
Inventory
Debtor
Commission Receivables
22000 10000
+1000
2000 
+1000
LiabilityCreditor
O/s Rent
Capital
Add commission income 
+5000 + 1000
29000
 +1000
36000 36000



8. Mohan has received advance fees $ 6000  from client before providing service to him.

(A) This advance fees of $ 6000 will our liability. Because if we will not complete our service, other person has to get money from us.

(B) Cash will increase with $ 6000


                    Total Assets          =   Total Liabilities + Total Capital
Cash + cash of advance fee Furniture
Inventory
Debtor
Commission Receivables
22000  + 600010000
+1000
2000 
+1000
LiabilityCreditor
O/s Rent
Advance Fees
Capital

+5000 + 1000
+ 6000
30000
42000 42000



9. Mohan has paid advance insurance of $ 7000 before due date.

(A) Cash will decrease with $ 7000

(B) A new asset of advance insurance will create with $ 7000 because we has right to get back same amount before due date of premium of insurance.


                    Total Assets          =   Total Liabilities + Total Capital
Cash - payment of advance insuranceFurniture
Inventory
Debtor
Commission Receivables
Advance Insurance Payment
28000  - 700010000
+1000
2000 
+1000
 + 7000
LiabilityCreditor
O/s Rent
Advance Fees
Capital

+5000 + 1000
+ 6000
30000
42000 42000



10. Mohan purchased Computer  of $ 3000 with business cash for personal use. 

(A) Cash will decrease $ 3000 for payment for buying computer.

(B) Capital will decrease because he withdraws  money for personal use. No, business will get power for not paying $ 3000 capital in future to businessman Mohan.


                    Total Assets          =   Total Liabilities + Total Capital
Cash - payment for computer for personal useFurniture
Inventory
Debtor
Commission Receivables
Advance Insurance Payment
21000  - 300010000
+1000
2000 
+1000
 + 7000
LiabilityCreditor
O/s Rent
Advance Fees
Capital
Less Drawing
( Purchasing of computer for personal use)
+5000 + 1000
+ 6000
30000
 - 3000


39000 39000



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Accounting Education: Accounting Equation Example
Accounting Equation Example
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