Sure, let's go through the transactions step by step, using the accounting equation:
Assets = Liabilities + Equity
1. Starting the business:
- Cash: Rs. 200,000
- Furniture: Rs. 500,000
Accounting Equation:
- Assets: Cash + Furniture = Rs. 200,000 + Rs. 500,000 = Rs. 700,000
- Liabilities: Rs. 0
- Equity: Rs. 700,000 (Initial investment from the owner)
Equation:
- 700,000 = 0 + 700,000
2. Purchase of goods:
- Purchase goods worth: Rs. 80,000 (Cash) and Rs. 70,000 (Credit)
- After purchase:
- Cash: Rs. 200,000 - Rs. 80,000 = Rs. 120,000
- Inventory (Goods purchased): Rs. 80,000 + Rs. 70,000 = Rs. 150,000
- Liabilities: Rs. 70,000 (Credit)
Accounting Equation:
- Assets: Cash + Furniture + Inventory = Rs. 120,000 + Rs. 500,000 + Rs. 150,000 = Rs. 770,000
- Liabilities: Rs. 70,000
- Equity: Rs. 700,000
Equation:
- 770,000 = 70,000 + 700,000
3. Paying house rent:
- House rent paid: Rs. 90,000
- After payment:
- Cash: Rs. 120,000 - Rs. 90,000 = Rs. 30,000
Accounting Equation:
- Assets: Cash + Furniture + Inventory = Rs. 30,000 + Rs. 500,000 + Rs. 150,000 = Rs. 680,000
- Liabilities: Rs. 70,000
- Equity: Rs. 700,000 (Same as before because rent is an expense and does not change owner's equity directly in this context, but it reduces the cash)
Equation:
- 680,000 = 70,000 + 700,000
4. Sale of goods:
- Sold goods costing Rs. 20,000 for Rs. 25,000 (Cash)
- After sale:
- Cash: Rs. 30,000 + Rs. 25,000 = Rs. 55,000
- Inventory: Rs. 150,000 - Rs. 20,000 = Rs. 130,000
- Revenue (which affects Equity): Rs. 25,000 - Rs. 20,000 = Rs. 5,000 (Profit)
Accounting Equation:
- Assets: Cash + Furniture + Inventory = Rs. 55,000 + Rs. 500,000 + Rs. 130,000 = Rs. 685,000
- Liabilities: Rs. 70,000
- Equity: Initial Equity (700,000) + Profit (5,000) = Rs. 705,000
Equation:
- 685,000 = 70,000 + 705,000
As we can see, the accounting equation (Assets = Liabilities + Equity) holds true at each step.
