Accounting Equation

12. A. State accounting process in brief. (3)

12. B. Prepare accounting equation from following details. (2)
• Started business with cash Rs. 2,00,000 and furniture Rs. 5,00,000.
• Purchase goods worth Rs. 80,000 on cash and 70,000 on credit.
• Paid rent Rs. 90,000.
• Sold goods costing Rs. 20,000 on cash Rs. 25,000.
Answers:
12. A. The following figure shows the components of accounting process or cycle.
a. Transactions: First of all, monetary transactions are identified and their required documents are collected.
b. Recording: After identifying monetary transactions, they are recorded regularly in a prime book called
‘journal’. In this case of big concerns, such transactions are recorded in a number of books of original entry
called ‘subsidiary books’.
c. Classification: After making entries in journal or subsidiary books, they are posted to the appropriate
accounts in the ledger periodically. Then after, their balances are determined.
d. Summarizing: In this step, a summary called ‘trial balance’ is prepared to check the arithmetical accuracy of
the entries made in the ledger accounts. After this, final accounts i.e., trading, profit and loss account and
balance sheet are prepared as summary reports.
e. Analyzing and evaluation: In this step, the data found in trading account, profit and loss account and balance
sheet are analyzed to draw conclusions about the profitability and financial positions of the business. Then
after, they are interpreted.
f. Communication: Finally, conclusions are communicated to internal and external users or parties.
In conclusion, the accounting cycle is a series of steps performed during the accounting period to record, classify,
analyze, summarize, and report useful financial information for the purchase of preparing financial statements.
12. B.
Accounting equation
Transactions Assets = Capital + Liabilities
a. Stated business .+ 200,000 .+ 700,000
.+ 500,000
Beginning equation 700,000 = 700,000
b. Purchased goods .+150,000 .+ 70,000
-80,000
New equation 770,000 = 700,000 + 70,000
c. Paid rent -90,000 -90,000
New equation 680,000 = 610,000 + 70,000
d. Sold goods .+25,000 .+5,000
-20,000
Ending equation 685,000 = 615,000 + 70,000
 Problems on Accounting equation
1. Following transactions are given:
a. Started business depositing Rs. 1,00,000 into bank.
b. Paid wages Rs. 10,000
c. Purchased goods on credit Rs. 5,000
d. Received house rent Rs. 2,000
Required: Accounting equation. [Ans: Assets=Rs. 97,000; Capital=Rs. 92,000; Liabilities=Rs. 5,000]

2. Following transactions are given:

i. Started business with cash Rs. 2,00,000
ii. Purchased goods for cash Rs. 50,000 and on credit Rs. 40,000
iii. Paid salary Rs. 20,000
iv. Goods costing Rs. 30,000 was sold for Rs. 40,000.
Required: Accounting equation. [Ans: Assets=Rs. 2,30,000; Capital=Rs. 190,000; Liabilities=Rs. 40,000]
3. Following transactions are given:
a. Started business with cash Rs. 250,000
b. Goods purchased on credit of Rs. 40,000
c. Goods costing Rs. 20,000 was sold for Rs. 25,000
d. Paid to creditors Rs. 10,000
Required: Accounting equation. [Ans: Assets=Rs. 2,85,000; capital=Rs. 2,55,000; Liabilities=Rs.30,000]
4. Following transactions are given:
e. Started business with cash Rs. 100,000 Bank Rs. 300,000 and Furniture Rs. 50,000
f. Purchased goods worth Rs. 100,000 from A & B suppliers.
g. Sold goods worth Rs. 50,000 in cash
h. Paid wages Rs. 12,000 by cheque.
Required: Accounting equation. [Ans: Assets=Rs. 538,000; Capital=Rs. 4,38,000; Liabilities=Rs.100,000]
5. Following transactions are given:
a. Started business with Rs. 80,000
b. Purchase goods with Rs. 10,000 on credit and Rs. 20,000 on cash basis.
c. Paid salary of Rs. 15,000.
d. Sold goods costing Rs. 5,000 at Rs. 8,000
Required: Accounting equation [Ans: Assets=Rs. 78,000; Capital= Rs. 68,000 and Liabilities=Rs.10,000]
6. Following transactions are given:
e. Started business with capital of Rs. 2,00,000.
f. Purchased goods of Rs. 50,000 on credit.
g. Paid salary of Rs. 20,000
h. Sold goods of Rs. 12,000
Required: Accounting equation [Ans: Assets=Rs. 2,30,000; Liabilities=Rs. 50,000; Capital=Rs.1,80,000]