chapter 5 accounting equation · chapter 5 accounting equation the accounting equation is, assets =...

Chapter 5 Accounting Equation

The accounting equation is, Assets = Equity + Liabilities

* The value of assets, liabilities and equity are changed due to business transactions. Therefore, business

transactions affect the accounting equation.

Activity 01 The following accounting equation of Jayantha's business shows the impacts of transactions

occurred in April 20xx

Note - Owner has not taken any cash drawings during the month.

Required - Describe the each transaction with the related amounts.

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Mahesha Perera Business & Accounting Studies – Grade 10 Tutorial 02 2

Note

(1)Transactions that lead to increase assets and decrease assets

1. Cash purchases 2. Cash sales 3. Credit sales

4. Receipt from a debtor 5. Purchase of a non-current asset for cash

(2)Transactions that lead to increase assets and increase equity

1. Capital introduction 2. Receipt of an income

(3)Transactions that lead to decrease assets and decrease equity

1. Cash drawings and stock drawings 2. payment of an expense

(4)Transactions that lead to increase assets and increase liability

1. Credit purchases

2. Obtaining a bank loan

(5)Transactions that lead to decrease assets and decrease liability

1. Payment to a creditor

2. Repayment of bank loan

Activity 04 The following table shows the impacts of transactions to accounting equation of a business.

According to this equation, write two possible transactions with amounts that may have taken place during each day.

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Owner’s equity

Owner’s equity = (Capital + Additional capital + Income) - (Expenses + Drawings)

Owner’s equity = (Capital + Additional capital + Profit) - Drawings

Activity 03 Following details are extracted from Jayantha's business for the year of 20xx.

Capital (as at 01.01.20xx) 415 000 …………………………………………………………..

Income of the year 210 300 …………………………………………………………..

Expenses of the year 122 000 …………………………………………………………..

Additional capital 50 000 …………………………………………………………..

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Required: Calculate the owner's equity as at 31st December 20xx.

Q. Following details are extracted from Amantha's business for the year of 2018.

Capital (as at 01.01.2018) 500 000 …………………………………………………………..

Income of the year 450 000 …………………………………………………………..

Expenses of the year 250 000 …………………………………………………………..

Profit of the year 200 000 …………………………………………………………..

Additional capital 50 000 …………………………………………………………..

Stock drawings 20 000 …………………………………………………………..

Cash drawings 30 000 …………………………………………………………..

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Required: Calculate the owner's equity as at 31.12.2018.

Order from left to right in the accounting equation

(1) Non-current assets

1. Land and building

2. Motor vehicles

3. Machinery

4. Furniture

5. Equipment

6. Investment (e.g. fixed deposit)

(2) Current assets

1. Stock

2. Debtors

3. Cash

(3) Equity

(4) Non-current liabilities

1. Bank loan

(5) Current liabilities

1. Creditors

2. Bank overdraft


Impact of transaction on the basic accounting equation

Transaction Assets = Equity + Liabilities

1 Investing capital Rs. 200 000

or Investing additional capital

Cash + 200 000 Capital + 200 000

2 Investing owner’s private motor

vehicle to the business Rs. 200 000 Motor vehicles +200 000

Capital + 200 000

3 Cash purchases Rs. 50 000 Stock + 50 000

Cash - 50 000

4 Credit purchase Rs. 50 000 Stock + 50 000

5 Payment to a creditor Rs. 50 000 Cash - 50 000

6 Purchase of a non-current asset

Rs. 70 000 Cash - 70 000

7 Cash sales Rs. 80 000

8 Credit sales Rs. 80 000

9 Receipt form a debtor Rs. 80 000

10 Sold goods at Rs. 80 000 which

were purchased at Rs. 50 000

11 Sold goods at Rs. 80 000 on

credit basis which were

purchased at Rs. 50 000

12 Payment of expense Rs. 20 000

13 Receipt of income Rs. 30 000

14 Cash drawings Rs. 10 000

15 Stock drawings Rs. 10 000

16 Opening a fixed deposit Rs. 50 000

17 Obtaining a bank loan Rs. 200 000

18 Repayment of bank loan Rs. 10 000

19 Payment of bank loan interest

Rs. 2 000

20 Paid bank loan installment of Rs.

20 000 including Rs. 2 000 as

the interest

21 Paid Rs. 50 000 to a business creditor

using owner’s personal cash

22 Opening a current a/c Rs. 50 000


Q. Indicate as increase or decrease on assets, equity and liabilities due to each transaction.

Transaction Assets = Equity + Liabilities

Investing capital Increase Increase

Obtained a bank loan

Credit purchases

Repayment of bank loan

Paid bank loan interest

Received interest income

Cash drawings

Stock drawings

Payment to a creditor

Activity 02 The following are the transactions relevant to the month of January 20xx of Thisuri's business.

Jan 01 Invested Rs. 300 000 as capital

Jan 04 Purchased goods at Rs. 50 000

Jan 09 Paid Rs 10 000 of monthly rent

Jan 13 Sold goods which cost for Rs 40 000 at Rs. 60 000

Jan 19 Obtained a bank loan of to Rs. 300 000

Jan 21 Paid Rs.10 000 from the business for telephone bill of Thushari's house

Jan 28 Received Rs. 30 000 from debtors

Jan 30 Paid interest of to Rs. 5000 for the bank loan

Jan 31 Paid electricity bill Rs. 5000

Required: Show the impact of each of transactions with amounts in the accounting equation.

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Q. The following balances were extracted as at 01.08.2018 from Sandamini's business.

Assets Rs. Liabilities Rs.

Furniture 300 000 Bank loan 300 000

Stocks 200 000 Creditors 100 000

Debtors 100 000

Cash 200 000

The following transactions occurred in August 2017.

1) Purchased goods at Rs. 100 000 to sell

2) Sold goods which were purchased at Rs. 100 000 for Rs. 125 000

3) Settled Rs. 50 000 of the bank loan

4) Paid Rs. 10 000 as salaries

5) Sandamini withdrew goods at a cost of Rs. 20 000 for her private use.

6) Purchased furniture at Rs. 50 000 for the use of the business

7) Purchased goods at Rs. 200 000 on credit basis.

8) Sold goods at Rs. 100 000 on credit basis. These goods had been purchased at Rs. 60 000

9) Received Rs. 80 000 from debtors

10) Paid Rs. 50 000 to creditors

Required: 1. Calculate the owner's equity as at 01.08.2018

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2. Show the impacts of the above transactions to the accounting equation.

Assets (Rs.) = Equity(Rs.) + Liabilities(Rs.)

Furniture + Stock + Debtors + Cash Equity +Bank loan + Creditors

Opening

balance 300 000 + 200 000 + 100 000 + 200 000 + 400 000 + 100 000

(1) + 100 000 - 100 000

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

Closing

balance


Chapter 6 Dual Impact of Transactions

Each transaction leads to change two items in the accounting equation. This is called as the dual impact of a

transaction. The accounting system, which records the same amount in debit and credit sides of accounts, is

called as the double entry system.

Account is used to record the change (increase or decrease) of an asset, an equity, a liability, an

income or an expense for a time period.

A collection of all accounts is called as the ledger.

Format of an account

Dr. …………………………… Account Cr.

Date Description L.F. Value

(Rs.)


(Rs)

Types of accounts

1. Asset accounts (E.g. Building A/C, Debtors A/C, Cash A/C, Bank A/C)

2. Liability accounts (E.g. Bank loan A/C, Creditors A/C, Electricity expense payable A/C)

3. Equity accounts (E.g. Capital A/C, Drawings A/C)

4. Income accounts (E.g. Sales A/C, Sales commission income A/C, Interest income A/C)

5. Expenses accounts (E.g. Purchases A/C, Salary A/C, Insurance A/C, Electricity expense A/C)

Recording transactions in accounts

There are 5 principles for the five types of accounts when recording transactions in accounts.

Expenses + Assets = Equity + Liabilities + Income..

Debit Credit

Credit Debit

Type of account Increase Decrease

E.g. 01/03/2018 Owner introduced capital to the business Rs. 200 000. Write the double entry.

Cash account Dr. Rs. 200 000

Capital account Cr. Rs. 200 000


Activity 02 Following are the transactions that occurred in a business. Record these transactions in accounts.

March 01. Introduced capital by the owner Rs. 200 000

02. Cash purchases Rs. 50 000

03. Paid the monthly rental Rs. 10 000

04. Cash sales Rs. 70 000

05. Purchased goods on credit Rs. 80 000

06. Withdrew money by the owner for personal use Rs. 10 000

07. Paid monthly salaries Rs. 20 000

08. Obtained a bank loan Rs. 200 000

09. Invested in a fixed deposit Rs. 10 000

10. Credit sales 60 000


Activity 03 Following are some transactions occurred in Namal's business. Record these transactions

in accounts.

Jan 01. Introduced capital Rs. 300 000

02. Purchased equipment for use in the business Rs. 50 000

03. Purchase goods on credit Rs. 80 000

04. Paid telephone bill of the owner's house using cash of the business Rs. 5 000

05. Cash sales Rs. 50 000

06. Paid insurance Rs. 7 000

07. Cash purchases Rs. 40 000

08. Paid creditors Rs. 20 000


Balancing off the accounts At the end of the month, the difference of the total of debit and credit entries in

accounts should be calculated. This difference is known as the balance of the account.

If Total of debit side > Total of credit side = debit balance.

Total of debit side < Total of credit side = credit balance.

Dr. Cash Account Cr.


Rs.


Rs.

01.03 Capital 100 000 04.03 Purchases 80 000

06.03 Bank loan 200 000 10.03 Rent expense 20 000

15.03 Sales 50 000 25.03 Electricity chargers 5 000

20.03 Commission income 15 000

29.03 Sales 60 000

Activity 04 Following cash book has been prepared by the account clerk of the Sameera's business

by including transactions that have occurred during the month of January 20xx.

Required:

1. Describe the transaction for each entry listed in the cash account in chronological order.

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Chapter 7 Prime Entry Books

Accounting books

(1)Prime entry books (2) Ledger

1. Cash book

2. Petty cash book

3. Bank account

4. Purchases journal

5. Sales journal

6. General journal

Prime entry book is the book in which a transaction is recorded at first before recording it in the

ledger accounts.

Prime entry books are also named as journals, day books and subsidiary books.

Importance of prime entry books

1. Easy to post transactions to the ledger after recording them in the prime entry book.

2. Minimize the number of entries posted in the ledger because the totals of prime entry books are

posted to the ledger

3. Minimize accounting errors and it is easy to find out such errors.

4. Minimize frauds since, responsibility of preparing each prime entry book is assigned a specific

individual.

Source document is the document that provides information of the transactions to record in the

prime entry books.

Dual function

Perform as a prime entry book

as well as a ledger account

Only prime entry books


As and when transactions take place in a business, the documents prepared by a particular section of business

by including all the details of such transactions and authorized by a person-in-charge are known as source

documents.

Details of source documents

Name and address of the business

Serial number

The date of the transaction taken place

The details of the other party connected to the transaction

Description of the transaction

The monetary value of the transaction

Signature of the officer who is responsible for the transaction

Uses of source documents

1. Can use as an initial document for a transaction

2. Can use as a written evidence of the transactions

3. Can obtain additional information of the transactions

4. Can use to record transactions in the prime entry books

5. Responsibility can be assigned to a specific officer as it is authorized by that person

Prime entry book Type of transaction Source document

1. Cash book Cash transactions

1. Cash receipts

2. Cash payments

Receipt

Payment voucher

2. Petty cash book Petty cash transactions

petty cash payments

Petty cash payment voucher

3. Bank account Transactions carried out through the current

account

1. Deposit of cash/cheques

2. Issue of cheques

3. Dishonoring of cheques

4. Direct remittances, standing orders,

bank charges

4. Sales journal Sales invoice

5. Purchase journal Credit purchase of trade goods

Purchase invoice

6. General journal Other transactions that cannot be recorded in

any other prime entry book

e.g. stock drawings

credit purchase of non-current assets

correction of errors, adjustment entries

Journal voucher


Chapter 8: The cash book and the petty cash book

Cash book. is the prime entry book in which cash receipts and payments are recorded

Dr. <-- cash increase Cash Book cash decrease --> Cr.

Receipts of cash Payments of cash

Cash receipts and cash payments are recorded in the cash book using receipts and payment

vouchers as source documents. These are prepared and signed by the cashier.

Receipt Payment voucher

Source document to record cash receipts Source document to record cash payments

written evidence of cash received by the business written evidence of cash paid by the business

issued by the business to the party who gave money

to the business

issued by the business to the party who received

money by the business

Dual function of cash book Cash book performs two functions.

1. Performs the function as a prime entry book

2. Performs the function as a ledger account (it has both the debit and the credit sides)

Recording transactions in the cash book Cash receipt - Cash book debit [increase of asset]

Cash payment- Cash book credit [decrease of asset]

Format of Cash Book

Business

Debtor

Creditor


Activity 02 Following are the details of the cash transactions of the business started by Purnima on

01.05.20xx. Following are the transactions that took place during the month ended on 31.05.20xx.

Required: Post the transactions to the ledger accounts and balance them off.

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Discounts A discount is the deduction from the value of a transaction.

Trade Discount is a deduction from the listed price.

Trade discounts are not recorded in accounts; only the net value after deducting the trade is

recorded in purchases/ sales accounts.

Purchased goods for Rs. 100 000 subject to 10% trade

discount. Calculate the net value of goods purchased.

Sold goods for Rs. 50 000 subject to 10% trade discount.

Calculate the net value of goods sold.

Rs.

Listed price = 100 000

Trade discount amount: 100 000 x 10% = (10 000 )

Net value of goods purchased = 90 000

Rs.

Listed price = 50 000

Trade discount amount: 50 000 x 10% = (5 000)

Net value of goods sold = 45 000

Cash Purchase Purchases a/c Dr. Rs. 90 000

Cash a/c Cr. Rs. 90 000

Cash sales Cash a/c Dr. 45 000

Sales a/c Cr. Rs. 45 000

Credit purchase Purchases a/c Dr. Rs. 90 000

Creditors a/c Cr. Rs. 90 000

Credit sale Debtors a/c Cr. Rs. 45 000

Sales a/c Cr. Rs. 45 000

Cash discount is a deduction from the amount due to prompt the payment within a given period.

Cash discounts are recorded in accounts

Credit purchase Credit Sale

Rs. 100 000 Rs. 50 000

10 % 10 %

Cash Payment Cash Receipt

Rs. 90 000 Rs. 45 000

Discount Received Discount Allowed

Rs. 10 000 Rs. 5 000

Discounts

Trade discounts Cash discounts

Business Creditor Debtor


Cash payment

of Rs. 90 000

to a creditor

Creditors a/c Dr. Rs. 90 000 Cash book Cr. Rs. 90 000

Creditors a/c Dr. Rs. 100 000

Cash book Cr. Rs. 90 000

Discount Received a/c Cr. Rs. 10 000 Discount

received of Rs.

10 000

Creditors a/c Dr. Rs. 10 000

Discount Received a/c Cr. Rs. 10 000

Cash Receipt

of Rs. 45 000

to a creditor

Cash book Dr. Rs. 45 000

Debtors a/c Cr. Rs. 45 000

Cash book Dr. Rs. 45 000

Discount allowed a/c Dr. Rs. 5 000


Discount

Allowed of Rs.

5 000

Discount allowed a/c Dr. Rs. 5 000


Discount columns in the cash book are considered as memorandum columns.

These columns serve only the purpose of a prime entry book not the purpose of a ledger account.

Therefore, the double entries for discounts should be entered in the ledger accounts separately.


Activity 03 Anuradha's business has the following balances as at 01.07.2018

Rs.

Cash 100 000

Debtors - Hemal 22 000

Kamal 28 000

Creditors - Savindu 25 000

Ravindu 20 000

Following transactions were taken place during the month of July.

05.07 10% discount was allowed when the amount owed to Ravindu of Rs. 20 000 was settled.

10.07 5% discount was allowed to Hemal when he settled his due of Rs. 12 000.

20.07 Rs. 500 discount was deducted when Ravindu was settled of Rs. 8 000

26.07 Hemal had sent a cheque of Rs. 9 000 after deducting Rs. 1 000 as discount

30.07 A 5% discount received when Rs. 25 000 was settled with Ravindu

Required: 01. Write up the cash book with discount column and balance off as at 31.07.2018

02. Write up the ledger accounts that involved the above cash transactions

Cash Book

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Petty cash book. is the prime entry book in which petty cash payments are recorded.

Petty cash book is maintained by the petty cashier, who is under the main cashier.

Source document of petty cash book is Petty cash payment voucher.

Like the cash book, the petty cash book also performs a dual function. (performs both functions

of a prime entry book and a ledger account )

Petty cash imprest is a specific amount of cash given to the petty cashier by the main cashier to

make petty cash payments.

* This is to make the petty cash payments with a control.

Duty of the petty cashier is to make petty cash payments out of the petty cash imprest.

Reimbursement of petty cash imprest is the amount equivalent to the payments made at that

time, given to the petty cashier to reimburse the imprest.

Imprest = Balance + Reimbursement

Reimbursement = Last month total expenses

Reimbursement = Last month total expenses + Increase of imprest

Rs.

Imprest 01/01/18 ------> 2 000

Total expenses in January ------> (1 800)

Balance as at 31/01 or 01/02 ------> 200

Reimbursement as at 01/02 ------> 1 800

Total expenses in February ------> (1 900)

Balance as at 31/01 or 01/03 ------> 100

Reimbursement as at 01/03 ------> 1 900

Activity 04 Sarasi Co. Ltd. maintains a petty cash book under a petty cash imprest system. As at 01st

February 2016, the petty cash balance was Rs. 330. In the petty cash voucher, total expenses during the

month of January was Rs. 1 670.

i How much is the petty cash imprest?

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ii How much will be the reimbursement made by the main cashier as at 01.02.2016?

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iii If the petty cash imprest was decided to be increased by Rs. 500 on 01.02.2016, then how much will be

the value of reimbursement?

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iv If the petty cash balance was Rs. 729 as at the 01.03.2016. Then, how much should to be reimbursed?

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Preparation of a petty cash book

Analysis columns are maintained to record similar types of petty cash payments.

Petty cash payments that cannot be entered in any of the analysis columns are entered in sundry

expense column.

Petty cash payments which need to be separately posted to the relevant ledger accounts are

recorded in other ledger account column.

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Receipt of petty cash imprest and reimbursement Petty cash expenses/payments

Petty Cash book Dr.

Cash book Cr.

Relevant expense account Dr.

Petty Cash book Cr.

* The totals of each analysis column should be posted to the relevant ledger accounts.

* The values recorded in the other ledger account column should be separately debited to the relevant ledger

accounts.

Format of a petty cash book


Example:

Following are the petty cash payments of

Nethmi’s business during March 2016. Petty

cash imprest was Rs. 2 000 which was received

on 01.03.2016.

Required: Prepare the petty cash book of

Nethmi’s business and other ledger accounts.

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Activity 05 Harini's business has the

following details.

Petty cash imprest of Rs. 3 000

Total payment for petty cash expenses

for the month of January 20xx is Rs. 2

400.

Petty cash expenses were reimbursed on

01.02.20xx and 01.03.20xx

Petty cash expenses for the month of

February 20xx are as follows.

Petty Cash Book

Receipts L. Date Description Payments Analysis columns Other L.

Rs. F

Rs.

Ledger a/c Rs. P

600 01/02 Balance /b/f

1 400

01/02 Cash

Stationery 60

Travelling 125

Pens 40

Trishaw chargers 300

Soap 60

Half-sheets 250

Cleaning 150

Entertainment 350

soft drinks 220

Bus fair 170

Viran 500 500

500

28/02 Balance /c/d

01/3 Balance /b/f

01/03 cash

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chapter 5 accounting equation · chapter 5 accounting equation the accounting equation is, assets =...

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