Need help on solving Accounting Equation for given transaction

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I am trying to solve a given question in my Accounts book by using basic accounting equation i.e. Assets = Liability + Capital. The question is as shown in the picture attached. I have tried to solve its Asset side but am really confused as to how to balance this equation. My first thought was to increase some other item from asset side there way no way to do it. Alternatively, I thought to reduce equations RHS where either I could reduce Liability to balance the equation (which I dont find any reason to do it) or reduce the 'Capital' by same amount. But if we reduce the Capital then how can we justify this move? Please guide me. 


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Replies (12)

Can you write the problem here please? The photo is not visible and upside down

(1) Proprietor withdrew for his personal use cash Rs. 20k and Goods worth Rs. 10k (2) Goods for Rs. 50k were given away as charity (Sale price Rs. 60k) (3) Goods worth Rs. 25k were distributed as free samples (4) Goods worth Rs. 50k and cash Rs. 20k were stolen by an employee (5)  Goods worth Rs. 1 lac were destroyed by fire. Insurance Company admitted and paid claim for 60% amount

Drawings/Capital a/c 30k

Cash a/c 20k

Inventory a/c 10k

next sale price is unimportant

Distribution expenses a/c 25k

Charity a/c 50k

To Purchases a/c 75k

&

P&L a/c 75k

To Inventory a/c 75k

the loss is not recoverable, so write it off

Pilferage a/c 70 k

To Inventory 50k

To Cash 20k

Finally,

Goods destroyed a/c 100k

To Inventory a/c 100k

Debtors/Receivables a/c 60k

To Insurance claim 60k

when the claim is received

Bank a/c 60k

To Receivables/Debtors a/c 60k

 

the problem is trading account is outdated. Otherwise COS method is very easy to understand.

Can we out it in this form:

Asset = Liability + Capital
Cash Goods   Charity Loss by Fire Loss by Theft    

Assets is fine, but liability is not correct. Capital is correct.

You got the equation correct, but 5e reality is 

Assets= Equity+ liabilities. 

If liabilities for this problem=0, it doesn’t matter.

assets =cash+goods

equity= capital+charity+loss by fire+theft

Liability=0 for this problem. 

Eg.

123₹ assets= 123₹ equity+0₹ liabilities. 

Asset= liability+capital is true. But when you spend cash or goods, the retained earning will reduce. That is why your balance sheet tallies. Assets reduce, your liabilities reduce. I hope you got it in the other problem as well.

Read more at: https://www.caclubindia.com/forum/balance-of-goods-coming-in-negative-while-using-basic-accounting-equation-574973.asp?offset=1

Thanks.. I will try it out myself. If I still face any difficulty I will post here

Your welcome. Remember this

assets increase= capital or liability or both will increase

assets decrease= capital or liability or both will decrease

this is true for each and every transaction

 

One last thing

when

asset like cash or bank decrease due to expenses= retained earning in capital account will decrease. 

Supposing

cash 100₹= Capital 50₹+liabilities 50₹

when you spend 50₹ Purchases on cash taken from capital account, the above changes as

cash 50₹= capital 0₹+liabilities 50₹

so, everything tallies.

Following your guidance, I have come up with my version of solution. Please have a look at it and suggest any correction:

 

At last step, the total of Asset side equals the total of RHS of the equation

                       
  Asset = Liability + Capital        
  Cash Goods Bank              
1   (10,000.00)     (20,000.00)           (30,000.00) Drawing from proprietor  
2       (50,000.00)           (50,000.00) Loss due to Charity    
3       (25,000.00)           (25,000.00) Loss due to Free Sample  
4   (20,000.00)     (50,000.00)           (70,000.00) Loss due to Theft    
5     (100,000.00)         (100,000.00) Loss due to Fire    
6        60,000.00            60,000.00 Claim passed by Insurance Co.  
    (30,000.00)   (245,000.00)    60,000.00 Total                    -       (215,000.00)        

Perfect! To represent what happens during the transactions, this is adequate. From your table anyone can understand how Equity is impacted due to the above transactions. 


CCI Pro

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