Page 59 - DMGT104_FINANCIAL_ACCOUNTING

Unit 4: Accounting Equation and Accounting Cycle

Liabilities Notes
Equity 345
Long-term loan 140
Short-term loan 25

Creditors 35
545
The following are some of the transactions entered into by X Ltd. during 2010-2011.
(a) Purchased a piece of land for 5 lakhs in cash.

(b) Collected 35 lakhs from debtors outstanding as on 31st March, 2011.
(c) Repaid an instalment of long-term loan 15 lakhs.
(d) Paid 20 lakhs to creditors
Show the effect of the above transactions upon the accounting equation.

Solution: The accounting equation (A = L + C) as on 31st March, 2011 stands as below:
A = L + C
or 545 lakhs = 200 lakhs + 345 lakhs.
The above equation is affected by every transaction entered into during 2010-2011. We shall
show the effect of each transaction separately.
(a) Purchased a piece of land for Rs. 5 lakhs in cash:
Original position:

A( 545 lakhs) = L( 200 lakhs) + C( 345 lakhs)
Revised position:
A[ 545 lakhs + 5 lakhs (land) – 5 lakhs (cash)] = L( 200 lakhs) + C ( 345 lakhs)
or A( 545 lakhs) = L( 200 Lakhs) + C( 345 lakhs)

(b) Collected 35 lakhs from debtors outstanding as on 31st March, 1997:
A[ 545 lakhs + 35 lakhs (cash) – 35 lakhs (debtors)] = L( 200 lakhs) + C( 345 lakhs)
or A( 545 lakhs) = L( 200 lakhs) + C( 345 lakhs)
(c) Repaid an instalment of long-term loan 15 lakhs:

A[ 545 lakhs – 15 lakhs (cash)] = L[ 200 lakhs – 15 lakhs (long-term loan)] +
C ( 345 lakhs)
or A( 530 lakhs) = L( 185 lakhs) + C( 345 lakhs)

(d) Paid 20 lakhs to creditors:
A[ 530 lakhs – 20 lakhs (cash)] = L( 185 lakhs – 20 lakhs (creditors)] + C( 345 lakhs)
or A( 510 lakhs) = L( 165 lakhs) + C( 345 lakhs)

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