Question

Analyze the effects of drew consultant your transaction on the accounting equation

Answer 1

Accounting Equation is very important to understand properly. It maintain the balnce between the assets and the liabilities. We know there is a double entry concept is present in the accounts. The doble entry states that every transaction effects the debit and the credit equally. Before discuss further we need to know the accounting equation. The accounting equation is as follow:

Accounting Equation:

Assets = Liabilities + Share holders' Equity

The assets includes all assets includes fixed and current assets. In other hand the liabilities includes all the liabilities i.e. all the current and long term liabilities. The share holders equity is the total of shareholders' fund and reserve and surplus. Every transcation effects the equation in both way.

We know there is concept of accounting cycle. The cycle is begin with Jouranl Entries and followed by Ledger posting, Trial Balance, Statement of Profit and loss account and ended up with Balance Sheet. The whole cycle is necessary to prepare and understad properly. It palys an important role and the same is effected the accounting equation. Each and every transaction effects the accounting equation in equal way i.e. the debit and the credit sid eof the accounting equation is affeted in same manner.

Let expalin the same with proper eample. For the same we consdered the following transaction:

1) Capital Introduced in the business $50000

2) Goods purchased in cash for $ 10000

3) Goods sold in cash for $ 15000

4) Wages paid for $ 2000

5) Outstanding expenses $ 500.

Now we will see how the above transaction effects the accouting equation.

For the 1st transaction i.e. introduction of the capital, the capital balance of the business is increased by $50,000. That means the shareholders balance will increased by $50,000. In other hand the introduction of the cash increased the cash balance of the business i.e. the assets of the business is also increased by $50,000. So the balance is maintain in accounting equation by equally increase in assets and liabilities by $50,000.

For the 2nd transaction the cash balance is reduced by $10,000 for the cash purchase. It is an expense. So it will reduce the profit as well as the shareholders' equity. So the total shareholders' equity is also reduced by $10,000. So the balance between assets and the liabilities is maintained by reducing the both side by $10,000.

For the 3rd transaction the cash inflow increased by $15,000 for cash sales. It will increase the total assets by $15,000. To maintain the balance between the accounting equation the liabilitires or crdit side should also increase by $15,000. Due to the cash sales the total revenue will increase and as a result of which the profit as well as the total balance of the shareholders' equity will increase. So the balance between accounting equation is maintained.

In the 4th transaction cash paid for the wages of $2,000. It means there is a outflow of $2,000 for the wages. As a result of which the total cash balance is decreased by $2,000. In other hand the wages paid also reduce the profit as well as the total shareholders' equity. So the balance between the total assets and the total liabilities is maintained and the accounting equation maintain the balance between total debit and the total credit.

Finally the 5th transaction the outstanding expenses create a current liability of $500. As a result of which the liability is increased by $500. But the same is set off by reducing the profit as well as total shareholders' equity. The outstanding expense is an expense. So it reduce the profit.

From the above discussion and the analysis it is clear what is accounting equation and how it maintain the balance between Total Assets and the Total Liabilities of the business. The same should be understand and analyse properly to understand the changes in accounting equationa and also to understand the impact of every transaction in the accounting equation and the change in the financial position of the business.