8/19/2024

TCS 2122:
ACCOUNTING FOR Lesson 3
TECHNOLOGISTS

K.K.N.B. Adikaram Accounting Equation

Department of Multidisciplinary Studies
Faculty of Technology
University of Ruhuna Defining accounting equation,
Transactions and their impact on accounting equation
20.08.2024 (ICT/BST)
23.08.2024 (ET)

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Learning Outcome Introduction to Accounting Equation

At the end of this lesson, the student will be

able to, • The assets and the ownership of those assets of a business are shown in
accounting records of that business.

❖ Describe the Accounting Equation • All assets should belong to some party of the business.

❖ Reflect the effect of simple transactions • Therefore, assets of a business should be equal to the total ownership of those
on the accounting equation assets.

• To show this relationship, an equation is used, which is called as the

Accounting Equation.

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Introduction to Accounting Equation

Accounting Equation Cont….
▪ When a business expands, the resources invested by owners would not be adequate.

❑Mathematical presentation of the relationship ▪ Therefore, the business will have to obtain resources from external parties.
between resource providers and resource holders .
❑ At any given time, aggregation of the equity & the ▪ When the business borrows money, liabilities arise.

total liabilities of an accounting unit should be equal to ▪ When there are liabilities in the business, a part of its assets belong to debt holders.
total assets of the organization.
▪ Remaining of the assets belongs to owners.

Assets = Liabilities ▪ In such a situation, accounting equation can be built as follows.

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Accounting Equation
Cont….
Transaction 1
Nimal Started a new business by investing Rs. 800,000 in his business.

Assets = Liabilities

Assets = External Liabilities + Owners Equity

Assets = Liability + Equity
+800,000 +800,000
(Cash) (Capital)
• Assets = Liabilities + Equity

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Transaction 2 Transaction 3
Nimal purchased a building for Rs. 200,000. He purchased a vehicle to his business for Rs.100,000.

Assets = Liability + Equity Assets = Liability + Equity

+200,000 +100,000
(Building) (Vehicle)
-200,000 -100,000
(Cash) (Cash)

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Transaction 4 Transaction 5
He purchased goods for Rs.100,000 to stock up the business. He purchased goods for Rs. 30,000 on credit basis.

Assets = Liability + Equity

+100,000 Assets = Liability + Equity
(Stock) +30,000 +30,000
-100,000 (Goods) (Creditor)
(Cash)

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Transaction 6 Transaction 7
He sold goods costing Rs.50,000 for Rs.70,000 on credit basis. ❑ He sold goods costing Rs.40,000 for Rs.50,000 for cash.

Assets = Liability + Equity Assets = Liability + Equity

-40,000 +10,000
-50,000 +20,000
(Stock) (Profit)
(Goods) (Profit)
+50,000
+70,000
(Cash)
(Debtor)

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Transaction 8 Transaction 9
Creditor was paid Rs. 20,000. Cash received from the debtor Rs.30,000

Assets = Liability + Equity

Assets = Liability + Equity +30,000
-20,000 -20,000 (Cash)
(Cash) (Creditor) -30,000
(Debtor)

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Transaction 10 Transaction 11
Goods costing Rs.10,000 were lost. (stolen, fire, flood, etc.) He paid business telephone bill Rs.7,000

Assets = Liability + Equity Assets = Liability + Equity

-10,000 -10,000 -7,000 -7,000
(Goods) (Loss) (Cash) (Expense)

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Transaction 12
Situations that change the
He borrowed money from a bank (as bank loan) Rs.50,000. equity

▪ The following transactions affect to change the

equity of the business.
Assets = Liability + Equity
▪ Introduction of additional capital
+50,000 +50,000 ▪ Drawings
(Cash/Bank) (Loan) ▪ Income
▪ Expenses.

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Activity 01 Activity 02
❑ Mr. Silva’s business position as on 1st January, 2024 is as follows:
• Buildings Rs. 15,000
• Furniture Rs. 1,500
• Show how following transactions in affect Accounting Equation • Stock of Goods Rs. 20,000
1. Mr. Perera started a business by investing cash of 500,000 , Land and Building of • Cash at Bank Rs. 5,000
200,000, Furniture of Rs. 100,000 and vehicles of Rs. 300,000. • Cash in hand Rs. 1,000
• Debtors Accounts Rs. 15,000
2. Purchase goods of Rs. 80,000 on cash • Suppliers Accounts Rs. 12,500
3. Purchase goods of Rs. 100,000 on credit • Loan Account Rs. 30,000
• Capital Account 15,000
4. Sold goods worth of Rs. 45,000 for Rs. 50,000 on cash
❑ Following are the transactions that took place within first 3 months of 2024. Show how following transactions can
5. Paid electricity bills of Rs. 2,000 affect Accounting Equation.
1. Cash purchases Rs. 12,500
6. Drawing cash of Rs, 6000 for personal use.
2. Bought supplies from of Kusum for credit Rs. 2,500
7. Settled Rs. 30,000 of Creditors 3. Sold goods worth Rs. 20,000 to Perera and received Rs. 23,000
8. Sold goods worth of 15,000 for 20,000 on credit basis 4. Drawings by the proprietor for household expenses Rs. 400
5. Sold goods worth Rs. 5,000 for credit
9. Received Rs, 20,000 from Debtors 6. Electivity bill for the period which is not paid. Rs. 300
10. Drawing Rs.5,000 goods and Rs. 10,000 cash for personal use 7. Bought new furniture for Rs.3,000
8. Sold goods for Saman worth Rs.10,000 for Rs. 20,000

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Thank you!

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