Prove the accounting equation (A=L+C) based on the following transactions: a) Started business with cash Rs. 500000 b) Purchased goods on credit Rs. 40000 c) Sold goods costing Rs.... Prove the accounting equation (A=L+C) based on the following transactions: a) Started business with cash Rs. 500000 b) Purchased goods on credit Rs. 40000 c) Sold goods costing Rs. 27000 on credit for Rs. 30000 d) Bank loan received Rs. 80000
Understand the Problem
The question provides a business's financials transactions and asks you to prove the accounting equation. This involves calculating assets, liabilities and equity.
Answer
The accounting equation (Assets = Liabilities + Capital) is proved as Assets (623000) = Liabilities (120000) + Capital (503000).
Here's how the accounting equation (Assets = Liabilities + Capital) is proved with the given transactions:
- Assets:
- Cash: 500000 (a) + 80000 (d) = 580000
- Inventory: 40000 (b) - 27000 (c) = 13000
- Debtors: 30000 (c) = 30000
- Total Assets: 580000 + 13000 + 30000 = 623000
- Liabilities:
- Creditors: 40000 (b) = 40000
- Bank Loan: 80000 (d) = 80000
- Total Liabilities: 40000 + 80000 = 120000
- Capital:
- Original Capital: 500000 (a)
- Profit from Sales: 30000 (Sales) - 27000 (Cost) = 3000
- Total Capital: 500000 + 3000 = 503000
- Accounting Equation:
- Assets = Liabilities + Capital
- 623000 = 120000 + 503000
- 623000 = 623000
Therefore, the accounting equation is proved.
Answer for screen readers
Here's how the accounting equation (Assets = Liabilities + Capital) is proved with the given transactions:
- Assets:
- Cash: 500000 (a) + 80000 (d) = 580000
- Inventory: 40000 (b) - 27000 (c) = 13000
- Debtors: 30000 (c) = 30000
- Total Assets: 580000 + 13000 + 30000 = 623000
- Liabilities:
- Creditors: 40000 (b) = 40000
- Bank Loan: 80000 (d) = 80000
- Total Liabilities: 40000 + 80000 = 120000
- Capital:
- Original Capital: 500000 (a)
- Profit from Sales: 30000 (Sales) - 27000 (Cost) = 3000
- Total Capital: 500000 + 3000 = 503000
- Accounting Equation:
- Assets = Liabilities + Capital
- 623000 = 120000 + 503000
- 623000 = 623000
Therefore, the accounting equation is proved.
More Information
The accounting equation is the foundation of double-entry accounting. It represents the relationship between a company's assets, liabilities, and equity.
Tips
A common mistake is not correctly calculating the profit or loss from the sold goods. Always remember to subtract the cost of goods sold from the sales revenue to determine the profit or loss.
Sources
- The Basic Accounting Equation | Financial Accounting - courses.lumenlearning.com
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