Accounting 

is based on the principle of two-sided. In order to carry out business activities, the
company needs funds; these funds must be given to the company by someone. The funds owned by
the company are called assets. Part of these assets is provided by the owner, total amount of funds
contributed by him is called owner’s equity or capital. If the owner is the only one who contributed,
then the equation A = O.E will be fair. (assets equal to capital).

However, the assets may be contributed by someone else who is not the owner. The debt of the
enterprise for these assets is called liabilities. Therefore, now the equation will take the following
form: A = L + O.E. (Assets equal equity plus liabilities). The left and right sides of the equation always
coincide.  

Assets= Liabilities + Owner’s Equity

The equality of both parts of the equation is always maintained. For deep understanding of
accounting equation, following are important accounting equation questions:

Problem 1:

Habib Ullah Sadiq is wholesale trader; following transactions are record in Accounting Equation?

i.  Commence business with cash Rs. 200,000 and Land Rs. 50,000.

ii.  Bought merchandising for cash Rs. 80,000.

iii.  Cash sales of worth Rs. 25,000.

iv.  Bought goods on credit from Salman of worth Rs. 50,000.

v.  Sales on account to Ali Raza Rs. 12,000.

vi.  Purchase furniture of the value of Rs. 5,000 by cash.

vii.  Received cash form Ali Raza of Rs. 10,000.

viii.  Return defective furniture of worth Rs. 1,500.

xi.  Paid wages Rs. 1,000, Rent 2,000 and Electricity Bill Payable Rs. 1,500.

Accounting Equation Format Download

Solution: 
 

>> Read Accounting Equation explanation.

Problem 2:

Muhammad Faizan Abid had the following transactions. Use accounting equation to show their
effect on his Assets, Liabilities and Capital?

a)  Invested Rs. 15,000 in cash.

b)  Purchased securities for cash Rs. 7,500.

c)  Purchased a home for Rs. 15,000: giving Rs. 5,000 in cash and the balance through loan account.

d)  Sold securities costing Rs. 1,000 for Rs. 1,500.

e)  Purchase an old car for Rs. 2,800 cash.

f)  Received cash as salary Rs. 3,600.

g)  Paid cash Rs.500 for loan and Rs. 300 for interest.

h)  Paid cash for expenses Rs. 300.

i)  Received cash for dividend on securities Rs.200.

Solution:

>> Understand Types of Accounts for Accounting Equation Problems and Solutions .

Problem 3:

Selected Transactions from Shah Transport Services began on June 1, 2016 by Zahid Shah as?

a.  Zahid Shah invested Rs. 600,000.

b.  Truck was Purchase by business for Rs. 430,000.

c.  Equipment purchased on credit for Rs. 9,000.

d.  A bill of Rs. 7,200 for transporting goods was sent to Mr. Ashraf Abbasi, a customer.

e.  Cash of Rs. 6,000 is received from the customer who was billed in d. 

f.  Received Rs. 22,300 is cash for transporting goods.

g.  A payment of Rs. 5,000 was made on the equipment purchased in c. 

h.  Paid expenses of different types for Rs. 1,700 in cash.

i.  Equipment of Rs. 1,200 was withdrawn from business for Zahid Shah’s personal use.

Required:  Arrange the Assets, Liabilities and Owner’s Equity accounts in an Accounting Equation,
using the following account titles: Cash, Trucks, Equipment, Account Receivables, Account Payable
and Owner’s Equity:

Accounting Equation Format Download

Solution:
 

>> Further study Golden Rules of Accounting.

Problem 4:

Prove that the Accounting Equation is satisfied in all following transactions of Wajeeha Ejaz owner of
business enterprises?

I.  Started business with cash value of Rs. 500,000.

II.  Rent paid in advance for a year Rs. 6,000.

III.  Purchased merchandising inventory for cash Rs. 80,000 and on account Rs. 20,000 from Mr.
Tahir.

IV.  Purchased Marketable securities for cash Rs. 100,000.

V.  Cash Sales Rs. 30,000 (cost 20,000).

VI.  During the period rent expires Rs. 2,000.

VII.  Commission paid during the trading was Rs. 1,000.

VIII.  Received cash dividend Rs. 4,000 on marketable securities.

IX.  Paid to Rs. 19,500 to Mr. Tahir in full settlement.

X.  Withdrew inventory for personal purpose by owner of worth Rs. 6,000.

Solution:

>> Practice Journal Entry Problems and Solutions.

Problem 5:

Show the effect of the following transactions upon the Accounting Equation?
      June 2017

1 Mr. Salman started business with cash Rs. 80,000, Inventory Rs. 50,000 & Machinery Rs 5,000.

5 Purchased furniture for cash Rs. 4,000 and purchased goods from Naveed store of Rs. 25,000.

 8 Sold goods to Rashid on credit basis for Rs. 8,000, costing Rs. 6,500.

12 Open a bank account and deposited Rs. 40,000.

18 Sold goods for cash Rs. 15,000, which is 20% above cost.

24 Received Rs. 7,800 from Rashid in full settlement for June 8th transaction.

29 Paid Rs. 24,700 to Naveed store in full settlement for June 5th transaction by bank.

30 Paid rent and salaries for the month Rs. 4,000 and wages outstanding for month Rs. 1,000.

Solution:
>> Read Balance Sheet for better understanding the Balance Sheet Equation.

Golden Rules of Accounting

Contents [show]

Previous Lesson: Accounting Cycle

Next Lesson: Journal Entry

Golden Rules of Accounting are used to record economic activity in books of accounts. These rules
are formulated on the basis of three basic accounts, personal, real and nominal account. An account
is a summarized record of the transactions relating to one person or thing or one class of income and
expense.

Debit is abbreviated Dr and credit is abbreviated Cr. The term debit means left, and credit means
right. They do not mean increase or decrease. The act of entering an amount of the left side of an
account is called debiting. Making an entry on the right side is called crediting. Golden rules of
accounting are based on blow mentioned accounts which classified into three categories:
Three Golden Rules of Accounting

Accounting golden rules of debiting and crediting are designed according to three basic accounts:

1. Personal Account

Personal accounts are recording transaction with persons or firms. Those accounts recording
transactions, which don’t affect particular person, but effects business in general, are
called impersonal accounts. Personal accounts may be further classified into three categories:

 Natural Personal Account

 Artificial Personal Account

 Representative Personal Account

Natural Personal Account is an account associated to human like Amna Tabbasum, Usman Khurshid,
etc. Artificial personal account is account related to any artificial person like XYZ Ltd, Ramin Trading,
Asadullah Industries, etc. on the other hand, representative personal account represents a group of
account. If there are a number of accounts of similar nature, it is better to group them like, rent
payable account, salary payable account, and insurance prepaid account, etc.

In case of personal account debit the account of the receiver and credit the account of the giver.

2. Real Account

The Real Accounts are those accounts which show dealing in thing or of property or
possession ‘Assets’ which are owned by the business organization. Such as cash, building, bank
account, office furniture. Thus, asset account is called a real account. There are two types of real
account:

 Tangible Account

 Intangible Account
Tangible assets are touchable assets having physical substance, such as machinery, stock, plant,
furniture, cash, etc., and intangible assets are non-touchable assets such as patent, goodwill,
copyrights, etc.

In case of real account debit the account of assets that comes in the business and credit the account
of that which goes out the business.

3. Nominal Account

Since this account does not represent any personal or real account, it is called nominal or fictitious
account. They relate to income, expense and gains or losses of a business concern. For example,
salaries account, advertising account, discount account, sales account, and commission received
account etc. These accounts do not have any existence, form or shape. All kinds of expense account,
loss account, gain account or income accounts come under the category of nominal account.

All the business transactions are recorded on the basis of the following golden rules of accounting.

Parts of Journal Entry

Single record of the business transaction is called entry. We use this term to describe record
transaction in Book of Accounts. There are three parts of journal entry. First write in first line just
after date line is debit, second must write in below line after indented ten spaces from data line
is credit and last part is narration which is brief description of transaction write within parenthesis.
Types of Journal Entry

There are two types of journal entry. First is simple entry and second is compound entry. Simple
Entry has one Debit and one Credit while, Compound Entry has more than on Debit or more than
one Credit or more than one Debit and Credit.

Styles of Journal Entry

There are four styles of journal entry. Following figure describes:

Golden Rules of Accounting

Below Golden Rules of Accounting is based on Six Pillars of Accounts. If we divide six Types of
Accounts into two groups. First group contains Assets, Drawing and Expenses have ruled that
increase will be Debited and decrease will be Credited. The second group contains Liabilities, Owner
Equity and Revenue has ruled that decrease will be Debited and increase will be Credited. Now we
would like to apply these rules one by one:
 

>> Practice Journal Entry Examples.

Discount

Discount is reduction in listed price. There are two types i.e. Trade Discount and Cash Discount (if
not mention than also cash discount). Trade Discount is not considering for entry while entries are
passed for cash discount.

Journal Entries Examples

Problem 1:

On April 01, 2016 Anees started business with Rs. 100,000 and other transactions for the month are:

2.  Purchase Furniture for Cash Rs. 7,000.

8.  Purchase Goods for Cash Rs. 2,000 and for Credit Rs. 1,000 from Khalid Retail Store.

14.  Sold Goods to Khan Brothers Rs. 12,000 and Cash Sales Rs. 5,000.

18.  Owner withdrew of worth Rs. 2,000 for personal use.

22.  Paid Khalid Retail Store Rs. 500.

26.  Received Rs. 10,000 from Khan Brothers.

30.  Paid Salaries Expense Rs. 2,000

Journal Entry Format Download

Solution:
 

>> Read explanation and examples of Journal Entry…

Problems 2:

Prepare general journal entries for the following transactions of a business called Pose for Pics in
2016:

Aug. 1: Hashim Khan, the owner, invested Rs. 57,500 cash and Rs. 32,500 of photography equipment
in the business.

      04:  Paid Rs. 3,000 cash for an insurance policy covering the next 24 months.

      07:  Services are performed and clients are billed for Rs. 10,000.

       13: Purchased office supplies for Rs. 1,400. Cash paid Rs. 400 and remaining outstanding.

       20:  Received Rs. 2,000 cash in photography fees earned previously.

      24:  The client immediately pays Rs. 15,000 for services to be performed at a later date.

     29:  The business acquires photography equipment. The purchase price is Rs. 100,000, pays Rs.
25,000 cash and signs a note for the balance.

Solution:
 

>> Understanding Chart of Accounts is required…

Problem 3:

On  March 2017, Farhan Rahim, starts wholesaling business. Following transactions as follows:

1.  He started business with capital of Rs. 15,000 and Land worth Rs. 10,000.

8.  Bought goods from Bilal and Friends Rs. 1,000 and by cash from XYZ Co. Rs 2,000.

13.  Sold goods to Rehman & sons Rs. 1,500 and sale by cash Rs. 5,000.

17.  Gave away charity of cash Rs. 50 and merchandising worth Rs. 30.

21.  Paid Bilal and Friends cash Rs. 975; discount received Rs. 25.

28.  Received cash from Rehman & Sons Rs. 1,450; allowed him discount of Rs. 50.

Journal Entry Format Download 

Solution:
>> More reading Normal Balance…

Problem 4:

Shah Sauood Marine is a boat repair yard. During August 2016, its transactions included the
following:

03.  Loan taken from Habib Bank Ltd. of Rs. 25,000. Rs. 20,000 withdrawn for business and remaining
in the bank a/c.

06.  Paid rent for the month of August Rs. 4,400 and accrued rent expenses was Rs. 600.
12.  At request of Kiwi Insurance, Inc, made repairs on boat of Jon Seaways. Sent bill for Rs. 5,620 for
services rendered to Kiwi Insurance Inc. (credit Repair Service Revenue).

18.  Made repairs to boat of Dennis Copper and collected in full the charge of Rs. 2,830.

20.  Placed Advertisement in The Dawn of Rs. 165, payment to be made within 30 days.

25. Received a check for 5,620 from Kiwi Insurance Inc representing collection of the receivable of
August 12.

30. Sent check to The Dawn in payment of the liability incurred on August 20.

Solution:

 
>>  Golden Rules of Accounting…

Problems 5:

1st  January, 2017, Saeed Ahmad started business other transactions for the month of June as
follows:

02.  Purchased from Kareem goods of list price of Rs. 6,000 subject to 10% trade discount by cash.

04.  Sold goods to Din Muhammad Rs. 800 and cash sales of Rs. 200.

10.  Distributed goods worth Rs. 200 as free samples and goods taken away by the proprietor for
personal use Rs. 100.

12.  Received discount Rs 20 and Commission Rs 500.

17.  Goods returned by Din Muhammad Rs. 200 and payment other outstanding amount.

24.  Furniture lost by fire of worth Rs. 500.

30.  Bad Debts during the period was Rs.100.

Solution:
General Ledger

Problems 1:

Creative Advertising, owned by Miss Abida Masood, provides advertising consulting services.
During January 2011, the following events occurred:

Jan. 2     Owner contributed Rs. 50,000 and a new computer costing Rs. 20,500 to start her business.

Jan. 4     Office supplies were purchased on account for Rs. 4,000.

Jan. 10   Creative Advertising obtained 12% 5-year loan of Rs. 20,000 from the bank.
Jan. 12   Creative Advertising paid the utility bills for Rs. 2,750.

Jan. 15   Paid the Rs. 3,000 in Accounts Payable from the purchase of office supplies on Jan. 4.

Jan. 24   Advertising services completed in January were billed to clients Annies’ Flowers at Rs.
18,300.

Jan. 27   Creative Advertising received Rs. 5,500 from Annies’ Flowers, a client, as payment on
account.

Jan. 30   Miss Abida Masood withdrew Rs. 6,000 of cash for personal use.

Requirement: Your are required to pass Journal Entry, post to appropriate general ledger account
and make a trial balance?

Solution: Journal Entry

 

>> See more journal entry Examples

Solution: General Ledger and Trial Balance

>> Read General Ledger chapter.
Problem 2:

Shah Garden Center is retail garden supplier. Record the transactions needed to journalize, post to
respective ledger account and prepare Trial Balance of the following for October, 2011 of the
current year:

Oct. 2     Purchased inventory on credit terms of 1/10 net 30. FOB shipping point, for Rs. 3,000.
Freight charges on the purchase were Rs. 150.

Oct. 9          Sold garden supplies on credit terms 3/20 net 30, FOB shipping point, for Rs. 4,000. The
cost of the supplies sold was Rs. 2,500.

Oct. 10   Paid the amount owed on account for the Oct. 2 inventory purchase.

Oct. 15   Received merchandise that was returned as defective, originally sold for Rs. 500 on Oct. 9.
The original cost of the supplies returned was Rs. 275.

Oct. 25  Received payment on account for the Oct. 9 sale less the appropriate sales discount.

Oct. 28      Inventory lost by fire of cost Rs. 350.

Journal Entry Format Download

Solution: Journal Entry

 

Solution: General Ledger and Trial Balance

>> Practice Journal Entry Problems and Solutions for better understanding of General Ledger
Problems and Solution.
Problem 3:

Record following transaction in T accounts directly?

Solution: Directly Recording in T Accounts

 
 

 >> Practice General Ledger Mcqs for conceptual understanding of General Ledger.

Problem 4:
Post transactions to appropriate T-account & make Trial Balance for ABC Ltd as on June 30th, 2008:   

1. Owner investment in Cash Rs. 10,000

2. Borrowing Rs. 1,000 from a local bank on a Note due in three months

3. Purchase Equipment of Rs. 500, paid Rs. 100 Cash and promising the rest on a Note Payable

4. Paid Rs. 150 for Stationery

5. Lent Rs. 200 to an employee who signed a Note promising to repay within 60 days

6. Service Revenue received during the period is Rs. 5,800

7. Paid Insurance for three year at start of this accounting period Rs. 1,800

8. Service Revenue of worth Rs. 1,200 earned but not received

9. Insurances expired recorded as Insurance Expense of Rs. 600

10. Personal withdrawal of owner of Rs. 700

General Ledger Format Download

Solution: Ledger and Trial Balance

>> Basic Practice for Accounting Equation Problems and Solutions.

Problem 5:

Post transactions to appropriate T-account & make Trial Balance with Totals and Trial Balance with
Balances and Totals for ABC Ltd as on March 30th, 2008:

Ahmed Bajwa, an interior decorator, completed the following transactions during the month of
March 2008.

1. Begun his business with Equipment valued at Rs. 80,000 and placed Cash Rs. 100,000 in a
business Bank Account.

2. Purchase a used Motor Car costing Rs. 50,000 and paid by check.
 3. Completed painting a two-story house and billed the customer, Rs. 24,800 (Account
Receivable Dr).

4. Received cash for painting two rooms, Rs. 5,000. It was kept in cash till.

5. Hired assistant to work with him, to be paid Rs. 100 per day.

6. Purchase supplies for Rs. 14,600 and paid by check.

7. Paid assistant for six days work, Rs. 600 in Cash.

8. Received cheque for painting five room apartment Rs. 33,600 and check is not deposited.

9. Transfer Rs. 2,000 to Business Bank Account.

Solution: Ledger and Trial Balance