The following is the accounting equation that always is equal at every step
Capital + Liabilities = Assets
Example:
a) Qamar deposits Rs 25,000 in bank to start Café business with the name of Café Inc.
Capital | = | Assets | |
(a) | Qamar, Capital 25,000 | Cash 25,000 |
b) Café Inc. purchases kitchen equipment for Café for Rs 17,400
Capital | = | Assets | |
Bal. (b) | Qamar, Capital 25,000 | Cash + Equipment 25,000 -17,400 +17,400 | |
Bal. | 25,000 | 7,600 17,400 |
c) During the month it purchases food supplies for Rs 700 agreeing to pay cash in future.
Liabilities + Capital | = | Assets | |
Bal. (c) | Trade Creditors + Qamar, Capital 25,000 +700 | Cash + Supplies + Equipment 7,600 17,400 +700 | |
Bal. | 700 25,000 | 7,600 700 17,400 |
d) During the month Cafe Inc. pays Rs 300 to the creditors.
Liabilities + Capital | = | Assets | |
Bal. (d) | Trade Creditors + Qamar, Capital 700 25,000 - 300 | Cash + Supplies + Equipment 7,600 700 17,400 -300 | |
Bal. | 400 25,000 | 7,300 700 17,400 |
e) During the month Cafe Inc. had sales of Rs 2,000.
Liabilities + Capital | = | Assets | |
Bal. (e) | Trade Creditors + Qamar, Capital 400 25,000 Sales 2,000 | Cash + Supplies + Equipment 7,300 700 17,400 +2,000 | |
Bal. | 400 27,000 | 9,300 700 17,400 |
f) Various business expenses incurred and paid were: wages Rs 550, rent, Rs 50, utilities, Rs 25, miscellaneous Rs 75.
Liabilities + Capital | = | Assets | |
Bal. (f) | Trade Creditors + Qamar, Capital 400 27,000 Wages Exp -550 Rent Exp - 50 Utilities Exp - 25 Misc Exp - 75 | Cash + Supplies + Equipment 9,300 700 17,400 -700 | |
Bal. | 400 26,300 | 8,600 700 17,400 |
g) At the end of the month Cafe finds out that total food supplies left are worth Rs 250.
Liabilities + Capital | = | Assets | |
Bal. (f) | Trade Creditors + Qamar, Capital 400 26,300 Supplies Exp -400 | Cash + Supplies + Equipment 8,600 700 17,400 -400 | |
Bal. | 400 25,900 | 8,600 300 17,400 |
h) Cafe determined that the equipment has become older after using for one month and its useful life has reduced, thus there is need to reduce the value of the equipment with an expense called Depreciation.
Liabilities + Capital | = | Assets | |
Bal. (h) | Trade Creditors + Qamar, Capital 400 25,900 Dep Exp -200 | Cash + Supplies + Equipment – Acc. Dep 8,600 300 17,400 -200 | |
Bal. | 400 25,700 | 8,600 300 17,400 -200 |
i) At the end of the month, Cafe withdrew Rs 500 from the business.
Liabilities + Capital | = | Assets | |
Bal. (i) | Trade Creditors + Qamar, Capital 400 25,700 Drawings -500 | Cash + Supplies + Equipment – Acc. Dep 8,600 300 17,400 -500 -200 | |
Bal. | 400 25,200 | 8,100 300 17,400 -200 |
Always accounting equation is equal
Capital + Liabilities = Assets
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