Exercises on Accounting Equation

Q 1 On August 1, Joseph set up Exacta Photocopying Shop. The following transactions took
place during the first month for the company. Show the effect of these transactions on the
Accounting Equation. Also prepare an Statement of Profit & Loss and Balance Sheet.

1. Joseph deposited Rs 70000 in the company’s bank account as his Capital Contribution.
2. Took a bank loan, Rs 25000. Money Deposited in Company’s Bank Account.
3. Rs 80000 withdrawn from Bank Account and Purchased for cash two photocopiers costing
Rs 40000 each.
4. Purchased on credit from INKCO, Paper, Ink and other consumable supplies, Rs 10000.
5. Received Photocopying Revenue in cash, Rs 25000. Rs 10000 deposited in Bank.
6. Paid Office Rent in Cash, Rs 2000.
7. Paid Staff salary in cash, Rs 600.
8. Billed Customers for Services, Rs 7000
9. Repaid a part of Bank Loan from Bank Account, Rs 10000.
10. Purchased a Photocopier Machine on Credit, Rs 40000.
11. A provision for Bad Debts is to be created @ 10% of Receivables. Another provision for
taxes is to be created @ 20% of Profit before Tax.

Q 2 On May 1, 2007 Mahindra opened a dry cleaning business. He completed the following
transactions during the month of May:

1. Invested Rs 25000 in the business as Capital Contribution out of which Rs 20000

deposited in Firm’s Bank Account.
2. Hired a Shop in main market of the city.
3. Purchased on account Cleaning Material for dry cleaning process Rs 10000 from JK
Traders.
4. Purchased on account the dry cleaning equipment Rs 15000 Indian Heavy Industries.
5. Received Rs 30000 as dry cleaning charges. Rs 10000 were still due on customers. The
cleaning material for Rs 9000 was used for same.
6. Paid rent for shop Rs 2000.
7. Paid stationary expenses Rs 500.
8. Paid for the material purchased in transaction no 2.
9. Purchased 100 Mutual Fund Units of Birla Mutual Fund at Rs 100 per unit. The amount
was paid through Bank Transfer. The Investment is for 3 Years.
10. Received Rs 1000 as dividend through Bank Transfer on Mutual Fund Units of Birla
Mutual Fund.
11. Depreciate Equipment Rs 1000.
12. Paid salaries for month of May for two assistants @ Rs 2000 each.

Develop accounting equation for the above transactions for the month of May. Also prepare an
Statement of Profit & Loss and Balance Sheet.
Q 3 On April 1, Animesh opened a shirt manufacturing & selling business. He completed the
following transactions during the month of April:
1. Invested Rs 150000 in the business out of which Rs 125000 deposited in Firm’s Bank
Account.
2. Purchased 2 stitching machines for Rs 25000 each. Paid through Bank Transfer
3. Applied for a bank loan with SBI. The application was accepted and Firm received Rs
50000 from Bank. (Assume it to be a Secured Loan). Money transferred to Firm’s Bank
Account. The loan is to be paid after 5 years.
4. Purchased cloth materials, Buttons and collars for Rs 30000 on credit.
5. Purchased Packing material for Rs 10000. Paid in Cash.
6. Sold Shirts for Rs 25000.The cost for the same involves Rs 12000 for Cloth material etc
and Rs 3000 for Packing Material. Entire amount received in cash.
7. Sold Shirts for Rs 15000 on credit .The cost for the same involves Rs 4000 for Cloth
material etc. and Rs 2000 for Packing Material.
8. Paid interest on bank loan Rs 1000.
9. Paid Electricity Charges Rs 2000.
10. Depreciate Machines for Rs 2000.
11. On April 29, the firm received an order for supplying 100 shirts @ Rs 1500 per shirt. The
delivery is to be made in 2nd week of May. An advance of Rs 35000 was received through
Bank Transfer.
12. Remuneration to Tailors is still unpaid at the end of the month Rs 5000.

Develop accounting equation for the above transactions for the month of April. Also prepare a
Statement of Profit & Loss and Balance Sheet.

Q 4 Salim set up a children’s Toy Shop in the month of April in a recently developed area in his
town. After two months, he had following balances:

Cash in Hand Rs 6000; Cash at Bank Rs 40000; Receivables Rs 5000; Toys in Stock Rs 58000;
Furniture and Steel Racks in Shop Rs 45000; Salim’s Capital Rs 100000; Loan from Friend Rs
15000; Suppliers Credit Rs 39000.

Following transaction were carried out during current month:

a) Purchased a Computer and a Bar Code Reader for Rs 25000 on credit. Useful life for
both is 3 Years.
b) Made total sale during the month Rs 89500. Cash Sale Rs 75000 and Credit Sale Rs
14500. The stock consumed in this sale is for Rs 55000.Other sales related expenses
paid in cash Rs 2500.
c) All Receivables of previous period paid during the month.
d) Suppliers of previous period were paid 50% of their due.
e) New toys were purchased valuing Rs 15000, paid in cash.
f) Salaries paid to Shop Assistant for Current month Rs 2500; Electricity Bill Rs 2500;
Shop Rent Rs 7500 all paid in cash.
g) Rs 5000 paid to Friend as part payment of his loan.

Prepare a Balance Sheet before taking the impact of Current month transactions. Analyze the
impact of current month transactions on Accounting Equation and prepare Statement of Profit &
Loss and Balance Sheet.
Q 5. Show the effect of the following transactions on the Accounting Equation and prepare the
Statement of Profit & Loss & Balance Sheet.

You are a Sole owner of a Business of Photocopying and Computer related work. You
have a running business which constitutes the following Assets and Liabilities as on
April 01, 2012:
Photocopying Machines 1500000; Computers 300000; Printers 100000; Scanners 50000; Land &
Building 2500000; Non-Current Investment 50000; Papers Inventory 175000; Ink Inventory
50000; Cash in Hand 27000; Cash Balance at SBI 124000; 15.5% Term Loan from Bank
2000000; Credit from Paper Suppliers 78000; Loan from your Father 150000.

You have carried out the following transactions in the month of April 2012.
Revenue from Photocopying Rs 59700 in cash and Rs 139000 on credit. Computer data work
earned you Rs 73000, all in cash. Paid the salaries of staff working on Photocopying Machines
Rs 40000 and on computers Rs 12000.Paid the Interest on Bank Loan for April 2012. Issued a
cheque for Rs 27000 towards the payment for the annual premium of Insurance Policy (Policy
effective from April 01, 2012) taken for the Shop. Issued a cheque of Rs 15000 to Paper Supplier
as a part payment. Depreciation is to be charged for April month on all fixed assets @ 20% p.a.
Interest received on investments for April 2012, Rs 2000.Sold the waste paper and blank cartages
Rs 5000.Electricity Expenses paid through Cheque Rs 12000. Monthly payment made to
Sweeper and Security Guard Rs 3500.Telephone Bill along with Internet charges for the month
paid Rs 5550.

The cost of material (Ink & Paper) to be used in photocopying is generally 22% of the total
revenue received. Similarly the cost of material (Paper) to be used in computer related work is
17% of the revenue generated.

The tax authorities have come out with a new circular according to which you have to pay tax on
your profit @ 25% on monthly basis. Since you calculate the profit on the last day of the month,
the tax is to be treated as payable and not paid. Show it in the Statement of Profit & Loss as
Provision for Taxes.
Q 6 Following are some of the transactions which you, as the sole owner of “TASTY
BURGERS”, carried out during the month of April, 2013. Develop an accounting equation with
the help of these transactions and prepare the Statement of Profit & Loss & Balance Sheet.
1. The month started with a stock of Burgers worth Rs 30000, vegetables Rs 25000, Tomato &
other sauce Rs 15000, Cheese Rs 20000.The other assets include shop worth Rs 555000,
Furniture Rs 175000, AC/Refrigerator Systems Rs 75000, cash in cash box Rs 5500 and with
SBI Saving Bank A/c Rs 80000.
2. The total sale for the first week of the month was 355, second week 320, third week 310 and
fourth week 300 pcs. The cost includes – Burger cost 35% of sales price, Vegetables cost
10% of Sale price, Sauce & Cheese 20% of sale price and other overheads 15% of sales
price.
3. TASTY BURGERS sells two types of burgers: normal and special. Normal burger is priced
@ Rs 60 while special burger is sold @ Rs 75. You have observed that ratio of the sales of
these burgers is 60:40, i.e., 60% of total sales is from normal burger and 40% is from special
burger.
4. TASTY BURGERS spent Rs 2500 on Pullouts which it placed in newspapers for advertising
of the shop.
5. TASTY BURGERS employs 2 cooks and 3 serving boys/girls. Cooks are paid Rs 5000 p.m.
each while serving boys/girls are paid Rs 2500 p.m. each. April month payment had been
made.
6. The electricity bill for the month is Rs 14750.Telephone bill is Rs 3200.
7. Mr Shyam Chandan, who is the mayor of the town, is celebrating his daughter’s birthday on
May 02. He came to the shop and placed an order for 250 TASTY BURGERS special type
for which he paid an advance of Rs 10000.
8. TASTY BURGER is a business which is proud of its ethical business dealings. Following
this, the business deposited Rs 5000 as advance tax with the tax authorities.
9. Looking at the trend of increasing demand for tasty burgers, the business thought of
importing a highly automated Burger making machine from Germany. The price for machine
in Indian currency is Rs 250000. An advance of an amount equivalent to Rs 50000 has been
made to the supplier. The machine will reach to TASTY BURGERS in the month of May.