Accounting Equation

Rules of Accounting equation at a glance

S. No. Transaction Accounts Affected
Assets Liabilities & Capital
1. Capital brought in cash Cash Increase (+) Capital increases (+)
Or Assets (+)
2. Drawing Cash decreases (–) Capital decreases (–)
Or Assets (-)
3. Fixed Asset Purchased
(i) for cash Cash (–), Asset (+) No, Treatment

(ii) on credit Fixed Asset (+) Liability (+)

4. Goods purchased
(i) for cash Cash (–); stock (+) No, Treatment

(ii) on credit Stock (+) Liability (+)

5. Payment to creditors Cash (–) Liability (–)

6. Sales of goods
(i) Cost Rs. 4,000 Stock (–) Rs. 4,000; Capital (+) Rs. 1,000 Profit
sold for cash Rs. 5,000 Cash (+) Rs. 5,000

(ii) Cost Rs. 5,000, sold to Stock (–) Rs. 5,000; Capital (+) Rs. 1,000 Profit
Ram on credit Rs. 6,000 Debtors (+) Rs. 6,000

(iii) Cost Rs. 9,000, sold for Stock (–) Rs. 9,000; Capital (–) Rs. 1,000 Loss
cash Rs. 8,000. Cash (+) Rs. 8,000

7. Cash received from debtors Cash (+), Debtors (–) No, Treatment
8. B/R drawn on Debtors B/R (+), Debtors (–) –
9. B/P accepted by creditors – B/P (+), Creditors (–)
10. Redemption of Loan
(i) by cash Cash (–) Loan (–)

(ii) by issuing share No, Treatment Loan (–); Capital +

capital
11. Purchase return Stock (–) Creditors (–)
12. Expenses
(i) Salary paid Cash (–) Cap. (–) as exp. is a loss

(ii) Salary outstanding Creditor (+), Capital (–)

or Salary unpaid

(iii) Salary Prepaid Cash (–); salary prepaid (+) (Salary O/s) as exp. is a loss

(iv) Salary paid includes salary prepaid (+) Capital (+) as exp.
prepaid salary Charged be reduced
13. Income (e.g. Interest)
(i) Cash received
(ii) Interest accrued
(due but not received)
(iii) Interest received in
advance (Unearned)
14. Adjustments for:
Interest on Capital Rs. 200
15. Interest on drawing Rs. 200
Cash (+) Capital (+) as it is gain
Accrued Int. (+) Capita (+) as gain
Cash (+) Int. received in advance
(Liability) +
– Capital (No effect) as
(i) Exp. will reduce cap.
by Rs. 200
(ii) Int. on cap. will
increase cap. by Rs. 200
Capital (No effect) as
– (i) Income will increase
capital by R 100
(ii) Int. on Drawing will
reduce cap. by R 100
16. Depreciation on fixed
assets
17. Bad debts
18. Discount received
(Paid Rs. 1,700 to creditor,
Ram in full settlement of his
claim Rs. 1,800)
19. Discount allowed
(Received Rs. 1,800 from
debtor, Ram in full
settlement of Rs. 2,000)
Fixed assets (–) Capital (–) as depreciation
is a loss.
Debtors (–) Capital (–) as bad debts is
a loss.
Cash (–) Rs. 1,700 Creditors (–) Rs. 1,800;
Capital (+) Rs. 100 as
discount received is a
income
Cash (+) Rs. 1,800; Capital (–) Rs. 100 as
Debtors (–) Rs. discount allowed is a loss.
2,000
20. Sales Return- Goods costing Stock (+) Rs. 200; Capital (–) Rs. 100 (Profit
Rs. 200 sold for Rs. 300 is Debtors (–) Rs. 300 is reduced)
returned
21. Interest on Loan Cash (–) Capital (–)
22. Paid Interest on Bank Loan Bank (–) Rs. 15,000 Bank Loan (–) Rs. 12,000
Along with installment Capital (–) Rs. 3,000 as
(3,000 + 12,000) interest paid is a loss
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