REPORT ON

ACCOUNTING EQUATION

SUBMITTED TO
MR. SADAT HUSSAIN

SUBMITTED BY
M.KAMRAN ROLL NO.BBAL-17

MUJAHID ABBAS JAFFRI ROLL NO.BBAL-06

SHAHARYAR AHAMD ROLL NO.BBAL-01

MUQADAS SULTAN ROLL NO.BBAL-12

MEHWISH HAYAT ROLL NO.BBAL-19

BBA(EVENING)

SESSION 2017-2021

BZU MULTAN

BAHADUR CAMPUS LAYYAH

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 DEDICATION

We would like to dedicate this accomplishment offline to our beloved and caring parents and to

our teachers with the support of whom we are standing at this step of our life stairs.

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 ACKNOWLEDGEMENT

First of all we are grateful to ALLAH ALMIGHTY, who bestowed our with health, abilities
and guidance to complete the project in a successful manner, and without any help of Allah we
were unable to perform this task.
More than anybody else, we would like to acknowledge our project advisor Mr. Sadat Hussain
for his never ending support and untiring efforts. He was always there to guide us whenever we
felt stuck off and his encouragement always worked as morale booster for us. We have found
him very helpful while discussing the tricky issues in this dissertation work.
We would also like to thank Mr. Ali Imran Rana (BM) from MCB Bank for providing us the
opportunity to have an excellent learning experience. His critical comments on our work have
certainly made us think of new ideas and techniques.

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 PREFACE

The main objective of any business student is to get as much of practical knowledge as possible.
Being an able to have a practical knowledge by developing a project is a lifetime experience. As
practical knowledge is an important as theoretical knowledge we are thankful of having a
project.

Through the development of the project we had a great experience of various strategies that can
be applied in development of project. This project is the stepping stone for our carrier.

We are pleased to present this project. Proper care has been taken while organizing the project so
that it is to comprehend. Also, various concepts have been implemented.

Table of Contents

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SR.# CONTETS PAGE NO.

I
1 Title page

II
2 Dedication

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3 Acknowledgement

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4 Preface

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5 Introduction of Topic

VII
6 Examples

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7 Conclusion

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Introduction to the Accounting Equation

Accounting equation describes that the total value of assets of a business is always equal to its
liabilities plus owner’s equity. This equation is the foundation of modern double entry system
of accounting being used by small proprietors to large multinational corporations. Other names
used for accounting equation are balance sheet equation and fundamental or basic accounting
equation.

Definition and explanation

We know that every business owns some properties known as assets. The claims to the assets
owned by a business entity are primarily divided into two types – the claims of creditors and the
claims of owner. In accounting, the claims of creditors are referred to as liabilities and the claims
of owner are referred to as owner’s equity.

Accounting equation is simply an expression of the relationship among assets, liabilities and
owner’s equity in a business. The general form of this equation is given below:

Assets = Liabilities + Owner’s Equity

Notice that the left hand side (also known as assets side) of the equation shows the resources
owned by the business and the right hand side (also known as equity side) shows the sources of
funds used to acquire the resources. All assets owned by a business are acquired with the funds
supplied either by creditors or by owner. In other words, we can say that the value of assets in a
business is always equal to the sum of the value of liabilities and owner’s equity. The total dollar
amounts of two sides of accounting equation are always equal because they represent two
different views of the same thing.

In accounting equation, the liabilities are normally placed before owner’s equity because
the rights of creditors are always given a priority over the rights of owners. Because of this
preference, the liabilities are sometime transposed to the left side which results in the following
form of accounting equation:

Assets – Liabilities = Owner’s Equity

If dollar amounts of any two of the three elements are known, we can solve the equation to find
the third one. For example, if a business has total assets amounting to $200,000 and total
liabilities amounting to $60,000, the owner equity must be equal to $140,000 as computed
below:

Assets – Liabilities = Owner’s Equity

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Example 1:
Mr. John started a T-shirts business to be known as “John T-shirts”. He performed
following transactions during the first month of operations:

1. Mr. John invested a capital of $15,000 into his business.

2. He purchased a building for $5,000 cash for business use.
3. He purchased furniture for $1,500 cash for business use.
4. He purchased T-shirts from a manufacturer for $3,000 cash.
5. He sold T- shirts for $1,000 cash, the cost of those T-shirts were $700.
6. He purchased T-shirts for $2,000 on credit.
7. He sold T-shirts for $800 on credit, the cost of those shirts were $550.
8. He paid $1,000 cash to his payables.
9. He collected $800 cash from his receivables.
10. The shirts costing $100 were stolen by someone.
11. Mr. John paid $150 cash for telephone bill.
12. He borrowed money amounting to $5,000 from City Bank for business purpose.

Required: Explain how each of the above transactions impacts the accounting equation of John
T-shirts.

Solution

Transaction 1: The investment of capital by John is the first transaction of John T-shirts which
creates very initial accounting equation of the business. At this point, the cash is the only asset
of business and owner has the sole claim to this asset. Therefore, the equation would look like
the following:

Equation element(s) impacted as a result of transaction 1: “Assets” & “Owner’s equity”.

Transaction 2: The second transaction is the purchase of building which brings two changes.
First, it reduces cash by $5,000 and second, the building valuing $5,000 comes into the business.
In other words cash amounting to $5,000 is converted into building. The impact of this
transaction on accounting equation is shown below:

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Equation element(s) impacted as a result of transaction 2: “Assets”

Transaction 3: The impact of this transaction is similar to that of transaction number 2. Cash
goes out of and furniture comes in to the business. On asset side, The reduction of $1,500 in cash
is balanced by the addition of furniture with a value of $1,500.

Equation element(s) impacted as a result of transaction 3: “Assets”

Transaction 4: The impact of this transaction is similar to transactions 2 and 3. One asset (i.e,
cash) goes out and another asset (i.e, inventory) comes in. The cash would decrease by $3,000
and at the same time the inventory valuing $3,000 would be recorded on the asset side.

Equation element(s) impacted as a result of transaction 4: “Assets”

Transaction 5: In this transaction, shirts costing $700 are sold for $1,000 cash. It increases cash
by $1,000 and reduces inventory by $700. The difference of $300 is the profit of the business
that would be added to the capital. The whole impact of this transaction on accounting equation
is shown below:

Equation element(s) impacted as a result of transaction 5: “Assets” & “Owner’s equity”

Transaction 6: In this transaction, T-shirts costing $2,000 are purchased on credit. It increases
inventory on asset side and creates a liability of $2,000 known as accounts payable (abbreviated
as A/C P.A) on the equity side of the equation. Since it is a credit transaction, it has no impact on
cash.

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Equation element(s) impacted as a result of transaction 6: “Assets” & “liabilities”

Transaction 7: In this transaction, the business sells T-shirts costing $550 for $800 on credit. It
reduces inventory by $550 and creates a new asset known as accounts receivable (abbreviated as
A/C R.A) valuing $800. The difference of $250 is profit of the business and would be added to
capital under the head owner’s equity.

Equation element(s) impacted as a result of transaction 7: “Assets” & “Owner’s equity”

Transaction 8: In this transaction, business pays cash amounting to $1,000 for a previous credit
purchase. It will reduce cash and accounts payable liability both with $1,000.

Equation element(s) impacted as a result of transaction 8: “Assets” & “Liabilities”

Transaction 9: In this transaction, the business collects cash amounting to $800 for a previous
credit sale. On asset side, it increases cash by $800 and reduces accounts receivable by the same
amount.

Equation element(s) impacted as a result of transaction 9: “Assets”

Transaction 10: The loss of shirts by theft reduces inventory on asset side and capital on equity
side both by $100. All expenses and losses reduce owner’s equity or capital.

Equation element(s) impacted as a result of transaction 10: “Assets” & “Owner’s equity”

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Transaction 11: The payment of telephone and electricity bills are business expenses that
reduce cash on asset side and capital on equity side both by $150.

Equation element(s) impacted as a result of transaction 11: “Assets” & “Owner’s equity”

Transaction 12: The loan is a liability because the John T-shirts will have to repay it to the City
Bank. This transaction increases cash by $5,000 on asset side and creates a “bank loan” liability
of $5,000 on equity side.

Equation element(s) impacted as a result of transaction 12: “Assets” & “Liabilities”

In above example, we have observed the impact of twelve different transactions on accounting
equation. Notice that each transaction changes the dollar value of at least one of the basic
elements of equation (i.e., assets, liabilities and owner’s equity) but the equation as a whole does
not lose its balance.

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Example 2:

Habib Ullah Sadiq is wholesale trader; following transactions are record in Accounting
Equation?
1. Commence business with cash Rs. 200,000 and Land Rs. 50,000.
2. Bought merchandising for cash Rs. 80,000.
3. Cash sales of worth Rs. 25,000.
4. Bought goods on credit from Salman of worth Rs. 50,000.
5. Sales on account to Ali Raza Rs. 12,000.
6. Purchase furniture of the value of Rs. 5,000 by cash.
7. Received cash form Ali Raza of Rs. 10,000.
8. Return defective furniture of worth Rs. 1,500.
9. Paid wages Rs. 1,000, Rent 2,000 and Electricity Bill Payable Rs. 1,500.

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Solution:

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Example 3:
Prove that the Accounting Equation is satisfied in all following transactions of
Wajeeha Ejaz owner of business enterprises?
1. Started business with cash value of Rs. 500,000.
2. Rent paid in advance for a year Rs. 6,000.
3. Purchased merchandising inventory for cash Rs. 80,000 and on account Rs. 20,000 from Mr.
Tahir.
4. Purchased Marketable securities for cash Rs. 100,000.
5. Cash Sales Rs. 30,000 (cost 20,000).
6. During the period rent expires Rs. 2,000.
7. Commission paid during the trading was Rs. 1,000.
8. Received cash dividend Rs. 4,000 on marketable securities.
9. Paid to Rs. 19,500 to Mr. Tahir in full settlement.
10. Withdrew inventory for domestic purpose by owner of worth Rs. 6,000.

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Solution:

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Conclusion
The accounting equation, whether in its basic form or its expanded version, shows the
relationship between the left side (assets) and the right side (liabilities plus capital). It also shows
that resources held by the company are coupled with claims against them.

There is a two-fold effect in every transaction. This results in the movement of at least two
accounts in the accounting equation. The amount of change in the left side is always equal to the
amount of change in the right side, thus, keeping the accounting equation in balance.

The accounting equation is very important. It will guide you in understanding related accounting
principles and help you solve many accounting problems.

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