Question

( I need answer as soon as possible).

Que. Explain the accounting equation with example.  Use the accounting equation to determine your net worth and identify your assets and liabilities . With this information, how would you increase your net worth in the future?

Answer 1

Solution:

Part A:

Accounting Equation is also called the balance sheet equation. Under this double-entry system, every transaction will have minimum of 2 effects. With the help of the Accounting equation, we can verify the impact of every transaction on 3 broad categories Assets, Liabilities, and Capital. The accounting equation must be equal explained as follows.

Accounting equation:

Assets = Liability + Capital

Examples of the accounting equation are as follows

Particular	Assets	=	liabilities	+	Capital
Started Business with cash 100,000	Cash 100,000	=	0	+	100,000
Purchase Furniture worth 30,000	Cash 70,000 (100,000 - 30,000). + Furntiure 30,000	=	0	+	100,000
Paid Salary in cash 5000	Cash 65,000 ( 70,000 - 5,000) + Furniture 30,000	=	0	+	95,000 (100,000 - 5,000)
Purchase Goods on credit 10,000	Cash 65,000 + Furniture 30,000 + Inventory 10,000	=	Creditor 10,000	+	95,000
Sold Inventory for 12,000 or cash	Cash 77,000 (65000+12000) + Furniture 30,000 + Inventory 0 (sold)	=	10,000	+	97000 (Cpaital 95,000 + Profit on goods sold 2000)
Total	107,000	=	10,000	+	97,000

Part B:

We can Identify Assets and Liabilities with the help of the accounting equation as follows

Assets = Liability + Capital (Basic equation)

or

Liability = Assets - Capital

or

Capital = Asset - Liability

Part C:

Net worth means the total assets minus total liability. This represents the owner's contribution to the business.

The company or firm can increase the Net worth by following ways

1. Paying down the liabilities like current liabilities under the desired and comfortable level of the company.

2. Increasing the assets of the company

3. A positive earning will have positive impact on income statement. Net profit will have positive impact on net worth.