Fundamental Accounting Equation - Problems and Solutions

Problem : 1

Show that the accounting equation is satisfied after taking into consideration each of the following transactions in the books of Mr. N
  1. Started business with capital 1,00,000
  2. Bought furniture 25,000
  3. Bought goods for cash 20,000
  4. Bought goods from Ram on Credit 5,000
  5. Sold goods for cash for 15,000
  6. Sold goods to Shyam on credit 8,000
  7. Paid cash to Ram 4,000
  8. Received cash from Shyam 5,000
  9. Paid Cash into Bank 25,000
  10. Withdrawn from bank 10,000

Solution »

  1. Capital + Liabilities = Assets
    1,00,000 + 0 = 1,00,000 (Cash)
  2. Capital + Liabilities = Assets
    1,00,000 + 0 =    75,000 (Cash)
    + 25,000 (Furniture)
  3. Capital + Liabilities = Assets
    1,00,000 + 0 =    55,000 (Cash)
    + 25,000 (Furniture)
    + 20,000 (Goods)
  4. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    55,000 (Cash)
    + 25,000 (Furniture)
    + 25,000 (Goods)
  5. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    70,000 (Cash)
    + 25,000 (Furniture)
    + 10,000 (Goods)
  6. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    70,000 (Cash)
    + 25,000 (Furniture)
    + 2,000 (Goods)
    + 8,000 (Shyam)
  7. Capital + Liabilities = Assets
    1,00,000 + 1,000 (Ram) =    66,000 (Cash)
    + 25,000 (Furniture)
    + 2,000 (Goods)
    + 8,000 (Shyam)
  8. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    71,000 (Cash)
    + 25,000 (Furniture)
    + 2,000 (Goods)
    + 3,000 (Shyam)
  9. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    46,000 (Cash)
    + 25,000 (Furniture)
    + 2,000 (Goods)
    + 3,000 (Shyam)
    + 25,000 (Bank)
  10. Capital + Liabilities = Assets
    1,00,000 + 5,000 (Ram) =    56,000 (Cash)
    + 25,000 (Furniture)
    + 2,000 (Goods)
    + 3,000 (Shyam)
    + 15,000 (Bank)
This solution differs from the next only in the way the data is presented. Data here is presented in the form of a statement while in the next it is presented in the form of a mathematical equation.

Problem : 2

Following are the accounting transactions relating to Mr. P's business. Use the accounting equation to show their effect on his assets, liabilities and capital.
  1. Commenced business with a Capital of 50,000
  2. Bought Machinery for cash 10,000
  3. Purchased goods for cash 15,000
  4. Purchased goods from A on credit 5,000
  5. Sold goods for cash 10,000
  6. Paid to A 2,000
  7. Sold goods to B on credit 3,000
  8. Paid into Bank 6,000
  9. Paid to A by cheque 1,000
  10. Received from B a cheque for 2,000

Solution »

This solution differs from the first only in the way the data is presented. Data here is presented in the form of a mathematical equation while in the previous it is presented in the form of a statement.

  1. Capital + Liabilities = Assets
    50,000 + 0 = 50,000 (Cash)
  2. Capital + Liabilities = Assets
    50,000 + 0 = 40,000 (Cash) + 10,000 (Machinery)
  3. Capital + Liabilities = Assets
    50,000 + 0 = 25,000 (Cash) + 10,000 (Machinery) + 15,000 (Goods)
  4. Capital + Liabilities = Assets
    50,000 + 5,000 (A) = 25,000 (Cash) + 10,000 (Machinery) + 20,000 (Goods)
  5. Capital + Liabilities = Assets
    50,000 + 5,000 (A) = 35,000 (Cash) + 10,000 (Machinery) + 10,000 (Goods)
  6. Capital + Liabilities = Assets
    50,000 + 3,000 (A) = 33,000 (Cash) + 10,000 (Machinery) + 10,000 (Goods)
  7. Capital + Liabilities = Assets
    50,000 + 3,000 (A) = 33,000 (Cash) + 10,000 (Machinery) + 7,000 (Goods) + 3,000 (B)
  8. Capital + Liabilities = Assets
    50,000 + 3,000 (A) = 27,000 (Cash) + 10,000 (Machinery) + 7,000 (Goods) + 3,000 (B)
    + 6,000 (Bank)
  9. Capital + Liabilities = Assets
    50,000 + 2,000 (A) = 27,000 (Cash) + 10,000 (Machinery) + 7,000 (Goods) + 3,000 (B)
    + 5,000 (Bank)
  10. Capital + Liabilities = Assets
    50,000 + 2,000 (A) = 27,000 (Cash) + 10,000 (Machinery) + 7,000 (Goods) + 1,000 (B)
    + 7,000 (Bank)