Accounting Equation Problem and Solution

Arjun EP

Published on: June 15, 2020

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

GOODS PURCHASED, RETURNED AND DISCOUNT

Goods purchase

Goods purchase for resale is known purchase.

It includes all cash and credit purchases.

Purchase does not include purchase of assets (plant, machinery, furniture, equipment etc).

It also includes goods-in-trade or goods-in-transit.

Credit purchase affects creditor (supplier, bills payable or account payable).

Full settlement and discount

When goods are sold on credit, amount will be received after some days.

At the time of credit sales trade discount is allowed.

At the time of cash received, cash discount is allowed.

Trade discount is not recorded in journal entry but cash discount is recorded.

Discount allowed is debited but discount received is credited.

Discount received

After purchasing goods on credit, organization is to pay amount to creditor or supplier.

While paying cash to creditor, organization can request some discount.

If creditor agrees to allow discount, it is income for an organization.

Discount received is added with capital in accounting equation.

Purchase return (return outwards, return to supplier, return to creditor)

Sometimes suppliers or creditors do not supply goods according to order.

Sometimes goods may be defective or excess in quantity.

In such a condition, goods are returned to suppliers.

Generally, credit purchase goods are returned and recorded in purchase return account.

Purchase return is deducted from stock as well as deducted from creditor in accounting equation.

Keep in Mind (KIM)

In accounting equation: opening stock, purchase, sales and closing stock is known as stock.

PROBLEM:

MK Traders has following extracted data:

(a) Business commenced by opening bank account of Rs 130,000.

(b) Business goods purchased by cheque Rs 25,000.

(d) Goods purchased from Sanjay worth Rs 42,000; partial payment paid by cheque Rs 17,500.

(e) Cheque issued to Shaukat Rs 34,000 in full settlement.

(f) Defective goods return to Sanjay Rs 1,500.

Required: Accounting equation

[Answer: Assets = 154,000; Capital = 131,000; Liabilities = 23,000]

SOLUTION:

Explanation:

(a) Bank balance is an asset; it increases assets.

(b) Goods (stock) is asset; it increases assets.

(c) Goods purchased from Shaukat is credit transaction; stock increases asset and creditor (Shaukat) increases liability.

(d) Goods purchased from Sanjay; stock 42,000 increases assets; partial payment 17,500 decreases asset. Remaining 24,500 increases liabilities.

(e) Full settlement means discount. Rs 34,000 decrease assets; 1,000 discount received increases capital.

(f) Defective goods returned decreases stock as well as creditor (Sanjay)

Accounting Equation

Particulars		Assets		=	Capital		+	Liabilities
A	Business started with bank balance	130,000	bank	=	130,000		+	0
	First equation	130,000		=	130,000		+	0
B	Business goods purchased by cheque	+25,000 −25,000	stock bank		0			0
	New equation	130,000		=	130,000		+	0
C	Goods purchased from Shaukat	+35,000	stock	=	0		+	35,000	creditor
	New equation	165,000		=	130,000		+	35,000
D	Goods purchased from Sanjay in cash and credit	+42,000 –17,500	stock bank		0		+	24,500	creditor
	New equation	189,500		=	130,000		+	59,500
E	Cheque issued to Shaukat and discount received	–34,000	bank		+1,000	discount		–35,000	creditor
	New equation	155,500		=	131,000		+	24,500
F	Goods returned to Sanjay	–1,500	stock	=	0		+	–1,500	return
	Final equation	154,000		=	131,000		+	23,000

Alternatively,

Accounting Equation

Particulars		ASSETS		=	CAPITAL		+	LIABILITIES
		Bank	+ Stock					creditor
A	Business started with bank balance	130,000	+ 0	=	130,000		+	0
	First equation	130,000	+ 0	=	130,000			0
B	Business goods purchased in cash	-25,000	+ 25,000		0
	New equation	105,000	+ 25,000	=	130,000		+	0
C	Goods purchased from Shaukat	0	+ 35,000		0			35,000	creditor
	New equation	105,000	+ 60,000	=	130,000		+	35,000
D	Goods purchased from Sanjay in cash and credit	-17,500	+ 42,000		0		+	24,500	creditor
	New equation	87,500	+102,000	=	130,000		+	59,500
E	Cheque issued to Shaukat and discount received	-34,000	+ 0	=	+ 1,000	discount		35,000	creditor
	New equation	53,500	102,000	=	131,000		+	24,500
F	Goods returned to Sanjay	0	–1,500		0			–1,500	return
	Final equation	53,500	+100,500	=	131,000		+	23,000