ee ee ae ee PETE ELL LLLP LET LS BUSINESS TRANSACTIONS & : ACCOUNTING EQUATION _ AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:- 42 DEFINE BUSINESS TRANSACTION. 4) DEFINE ACCOUNTING EQUATION AND ITS IMPORTANCE. 42 ‘EFFECTS OF BUSINESS TRANSACTIONS ON ACCOUNTING EQUATION 4] CALCULATION OF THE VALUE OF MISSING COMPONENTS. "a"a"a"a"s"a"s"a"aa"s"a"aaae"aTeTa"sa"a"asss"sss"eaa"ess as Maa eae eee ee at ” : : = " a : = = “ Fy " = = : aa aaa aaa" a aaa aaa aaa yasBUSINESS TRANSACTIONS AND ACCOUNTING EQUATION BUSINESS TRANSACTION \ tramsvetion has been defined as "an exchange of value", Any exchange of value fvings about an immediate change in the amount, nature, or composition of a firm's assets or equities, A transaction has tiken plice when a firm buys buildin, s have been aected as a result of this transaction since the firm has new asset in the form of building if the payment has been paid in cash, another asset cash has been also affected. If the parchase is on credit, liabilities are Neeted. Briefly we can say that the occurrence of an event or of condition that must be recorded is called business transaction, Business operations consist of a series of transactions. One of the purpose of Accounting is to record the stream of transactions so that their affect can be correctly and clearly reflected in the Accounting reports operation ean be easily measured. tions will fall into the following basic groups:~ upon assets and equities and the results of the business Most of the business trans 1) Investment of the capital by the owners, 2) Purchase of goods, assets and services. 3) Sale of goods or services to customers either for cash or on credit, 4) Collection of receivable from customers or other 5) Payment of liabilities incurred on the purchase of goods and services. 6) Borrowing of funds from financial institutions and others 7) Withdrawal of assets and goods by owners. 8) Repayment of borrowed funds ACCOUNTING EQUATION Accounting equation may be defined as "a device by which the fingneial position of a business can be checked at a glance", Balance Sheet also serve the same purposes as the Accounting equation is, Due to this reason we say that when the Balance Sheet equality is expressed in equation form, the resulting equation is called the Balance Sheet equation or Accounting equation which is expressed as under: . As: s = Equities (Liabilities + Owner's equity or Capital) OR = Liabilities + Owner's equity or Capital AssetsEFFECTS OF BUSINESS TRANSACTIONS ON ACCOUNTING EQUATION oss transaction affects the element of Accounting equation, because when any asset is purchased, the owner not only acquires the properties but also ' I These rights in assets are equal to the value of that equities will be divided into owner's are called the liabilities and owner Each and every busi rights associated to that property. inst the a The outside equ asset. In this way the right equity and outside equitic equities are called as It means that every business ha way that following situations may arise: ts the element of Accounting s transaction equation in su ase or decrease in owner's equity or Capital. above three situations the assets and liabilities would be effected directly while the owner’s equity would increase by increasing the revenue and decrease by increasing the expenses or losses. The effect is shown below by the use of (+) = or (-) placed against the element affected. To illustrate this concept, the following business transactions are assumed. Transaction 1. . Mr. Saleem started his business by investing therein cash Rs. 4,00,000, The effect of this transaction will be that the cash will increase by Rs. 4,00,000 and owner's equity or capital will also increase by the similar amount. The equation will appear as follows:- Asset = Equities Cash iabiliti Liabil + it + Rs. 4,00,000 = i ; a Reo 000, Transaction 2, Purchased Merchandise 2 ; _ curehased Pere and paid cash Rs. 1,00,000. The effect of this transaction nts of the Accounting equation is that the asset cash decreased by Rs. Assets : — Cash + ie Equity. 4,00,000 Merchandise =~ Liabilities + Capital - — 1,00,000 + — Tooe00 a + 4,00,000 3,00,000 + _1,00,000 = +--+ 4,00,000ions and Accounting Equation 35 Transaction 3, Mr. Saleem purchased building for cash Rs. 100,000. This transaction affected the Accounting equation as the increase in one asset building and decrease in another asset cash with the same amount. Assets = Equity Cash + Merchandise + ~~ Building = Liabilities + Capital 3,00,000 1,00,000 + 4,00,000 =_ 100.000 + + 1,00,000 2,00,000 + 1,00,000 + 1,00,000 = + 4,00,000 Transaction 4. Merchandise worth Rs. 50,000 was sold for cash Rs. 60,000. The cost of the merchandise sold was Rs. 50,000 and it was sold for Rs. 60,000. There is a profit of Rs. 10,000. Profit belongs to the proprietor; therefore, proprietorship i.e. the capital will increase by Rs. 10,000. The effect of this transaction is therefore; a decrease in merchandise to the extent of cost Rs. 50,000 an increase of Rs. 60,000 in cash asset and increases in capital Rs, 10,000. Thus:— Assets = Equity Cash + Merchandise + Building = Liabilities + Capital 2,00,000 1,00,000 + — 1,00,000 + 4,00,000 + 60,000 ~ 50,000 + 10,000 2,60,000 + 50,000 + 1,00,000= + 4,10,000 Transaction 5. Mr. Saleem purchased Merchandise from Nazir for-Rs. 20,000 on credit. The effect of this transaction on Accounting equation is that the asset merchandise will increase by Rs. 20,000 and liability is also increased by the same amount. This transaction brings about a change on both sides of the equation. Assets. = Equity Cash + Merchandise + Building = A/C payable + Capital 2,60,000 50,000 + — 1,00,000 vn - 4,10,000 + 20,000 + 20,000 2,60,000 + 70,000 + 1,00,000 = 20,000 +4,10,000 Transaction 6. Mr. Saleem paid Rs. 10,000 to Nazir on Account. This transaction will decrease cash Rs. 10,000 and Accounts payable will also decrease by the same amount. The new equation will be as under: Assets = Equity Cash + — Merchandise + Building = A/C payable + — Capital 2,60,000 70,000 + 100,000 20,000 + -4.10,000 - 10,000 + . —10,000 : 2,50,000- + 70,000 + 1,00,000= 10,000 + 4,10,00036 runud Transaction 7. Peer Sold Merchandise ing ion is of this transaction on Accounting equation cost is Rs. Kari it Rs. 10,000 the cost Is ; Bal. 12.250 + 30,000 + 8.300 + 3.000 + 2,20 = 17,000 + 38,750 5 = _ 5575 Total: 55,750 5 Solution: Balance Sheet As on 31" December 2006 Assets Amount Equities Amount Cash 12,250 | Accounts payable 17,000 Building 30,000 | Capital 38,750 Furniture 8,300 Accounts Receivable 3,000 Merchandise 2,200 Total 55,750 | Total 35,750 CALCULATING THE VALUE OF MISSING COMPONENT As we know that there are three components of Accounting equation i ies and capital, which are shown in equation form as;— . assets, Assets= Liabilities + Capital If the value of two components are given then the be calculated by applying mathematical approach, £8 the given value of assets is RS. 60,000 and labilit r capital can be calculated as under, Mies OF Rs, 40,000, then the value o value of third component can Assets = anon : ae Liabilities ; + Capital Capital = Assets iabilitic by putting the values; ~ % ‘poities Capital = 60,000 -~ 40,000 OR 20,000 | | |Business Transactions and Accounting Equation a Mustration 4, Determine the value of missing component: Assets = Liabilities + Capital a) Rs, 90.000 Rs. 30,000 + Rs. ? b) Rs. 70,000 + Rs. + Rs. 30,000 c)Rs.? = Rs. 35,000 + Rs,. 40,000 Solution: a) Aswe know tha , Assets = Liabilities + Capital It means that: Capital = Assets - Liabilities by putting values: < Capital = 90,000 - 30,000 Capital = 60,000 b) _ Aswe know that: Assets = Liabilities + Capital OR Liabilities cs Assets - Capital by putting valu . Liabilities = = 70,000 - 30,000 Liabilities = 40,000 ©) Aswe know that: Assets = Liabilities + Capital by putting values: Assets. 35,000 + 40,000 Assets 75,000 Mustration Below is given the incomplete Balance Sheet of a business. Assets Amounts Equities Amount Cash 30,000 Accounts payable 5,000 AIR 15,000 | Bank Loan 10,000 Building 40,000 Furniture 15,000__| Capital 2 1,00,000 L. ? Required: Complete the Balance Sheet by calculating the value of capital.42 Fundam y ion: We know that; Capital ei = . Liabilities + ssets = f Liabilities xe ite = total value of assets - total values of fet capi ear = 1,00,000 Total values of assets = »00,! , and total values of liabilities = 15,000 (10,000 pean )) by putting the values = 1,00,000 - oe = 85, € 4 ete Balance Sheet is as under:~ Now the complete Bal a Assets Amounts. Equities Amount sh 30,000 | Accounts payable 0 NR 15,000 | Bank loan i 0,000 Building 40,000 Capital . Furniture 1,00,000 1,00,000 HOT NOTES) SHORT ANSWER QUESTIONS C1 Write the short Answers of the following questions Q.1. What is business transaction? Q.2. Define Accounting Equation, Q.3. What is accounting Equation? Q4. Define external transactions, Q.5, Define internal transactions, Q.6. What is meant by Equity? Q.7. Define Assets, Q.8. What are fixed assets? Q.9. What are current assets? Q.10. Define Tangible Assets, QU. Explain Intangible Assets, QU2. Define Liabilities / Q.13. What are the current liabilities? Q.14. What are fixed liabilities and long-term liabilities? Gus. Define Owner’s Withdrawal, 6. What will ital i in ya amowntng ano capa if assets are amounting Rs. 1,00,000 and the Q.17. What will be the am the liabilities Rs, 1,00,000, Q.18. What will be the am, Capital are amounting Rs, lount of assets if the capital is Rs. 2,00,000 and the amount of ount of Liabilities i i FS Oe if assets are amounting Rs. 1,60,000 and theRusiness P Hone aud Ave my mgt [reomrrats] L Mi N stunted buasian chain the month are given a) Rough merchandise on credit Ry, 3,000. DY Bought tarmitre tor east Rs, 0,000. ° NE merwhantdive for cart Ry, 20,000. A) Patd amaze on purchases Rs, 200 c) Sold merchandise tor casts Rs. 12,000 costing Ry, 10,000 0 Paid cash Rs, 3,000 against Accounts payable, g) Paid salaries Rs. 3,500, Required: how the eftect of each tamsaction on Accounting equation, Answe 49,300 Hints: Transaction (c) deduct Rs, 10,000 trom merchandise, add Rs, 13,000 in cash and also add Rs, 3,000 in capital, 2000 January 1 Ahsan started a business with cash Rs. $0,000, 5 a 10 a 12 a 3 a MW Purchased merchandise for eash Rs. 10, 00. ™ 1s Sold merchandise to Rehman and Sons, Rs, 15,000. Costing Rs, 13,000, a 21 Received cash from Rehman and Sons. Rs, 3,000, “ 2 Paid cash to Saleem and Co. Rs. 3,000. a 31 Paid salaries for the month Rs. 2,500. Required: Show the eff of the above transactions on the As liabilities and owner's equity. Answer: $4,250 3. Mr. Aslam started business with cash Rs, 80,000, His selected transactions for the month are given below: a) _ Bought furniture for cash Rs. 6,000, b) Bought merchandise on credit Rs. 20,000 . c) Sold merchandise on credit Rs. 10,000 costing Rs.8,000/- 4) Paid cash Rs. 19,900 and received discount Rs. 100. e) Merchandise costing Rs. 10,000 were sold for Rs. 13,000 on cash basis. fy ved cash from debtors Rs. 9,950 and allowed discount Rs. 50. 8) Rs. 1500 and Rent Rs. 2,000. Show the effect of each transaction on the element of Accounting Equation,