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
	30000		30000

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
	35000		35000

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

Related : Accounting Examples