What is the Accounting Equation?
Limitations of the Accounting Equation
Example of the Accounting Equation
- Started business with $200000 cash.
- Purchased goods $25000
- Paid salary $10000
- Sold goods costing $20000 at a profit of 25% on the cost
- Paid salary in advance $2000
- Introduced additional capital of $10000
- Purchased computer for $15000
- Deposited $50000 into the bank
Analyzing the transactions:
- If the business started investing cash that will affect the owner’s equity section and also affect the asset section. Both asset (cash) and owner’s equity increase.
- Purchasing goods will reduce the cash and also increase assets.
- Paying salary will reduce cash (Assets) and also reduce the Owner’s equity as an expense.
- Goods sold $20000 so the stock will reduce by $20000. We will receive $25000 (25% of 20000) as cash, So the cash will increase. And we made a profit of $5000 so that will be added to the owner’s equity.
- Paying advance salary will create an asset as the labor owes the service to us now. So, it will increase Pre-paid Salary (assets), and also paying cash will decrease our cash balance. So, decrease in cash (assets).
- Added to Cash and added to Owner’s equity.
- Decrease in cash, increase in the computer as an asset.
- Cash decreases and bank balance increases.
Sheet Name :- Sheet1
|ASSETS||LIABILITIES + CAPITAL|
|2||(25000) 475000||25000 25000||500000||500000||500000|
|3||(10000) 465000||25000||490000||(10000) 490000||490000|
|4||25000 490000||(20000) 5000||495000||5000 495000||495000|
|5||(2000) 488000||5000||2000 2000||495000||495000||495000|