The first step in the accounting process is to analyze every financial transaction that affects the business.
Accounting equation is always, Assets = Owner’s Equity + Liabilities
After recording every financial transaction, this equation must remain in balance
Accountants must analyze each financial transaction to determine how it affects owner’s equity as well as assets and liabilities before recording the transaction.
Formulas for Analyzing Transactions for Accounting Equation
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
Formula for increase in equity
|
Increase in equity |
= |
Ending equity – Beginning equity |
Or, |
Increase in equity |
= |
Net Income – Dividend + New common stock |
|
|
|
|
Where: |
Equity |
= |
Assets – Liabilities |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1A TU Model Question
An enterprise has total assets of Rs 500,000 and liabilities of Rs 300,000 at the beginning of the year. During the year, the company earned Rs 200,000 and distributed Rs 50,000 dividend.
Required: Equity at the end of the year
[Answer: 350,000]
SOLUTION
Given and working note:
Beginning equity |
= |
Assets – Liabilities |
|
= |
500,000 – 300,000 |
|
= |
Rs 200,000 |
Ending equity
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
|
= |
200,000 + 200,000 – 50,000 + 0 |
|
= |
Rs 350,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1B
EP Online Study LLC has the following extracted financial data: ($/₹/Rs)
|
Assets |
Liabilities |
|
1st January 2019 |
54,000 |
36,000 |
|
31st December 2019 |
124,000 |
58,000 |
|
Required: (1) What is the beginning equity?
(2) What is the ending equity?
(3) What is the increase in equity?
(4) If the company issues new common stock of Rs 19,000 and pay dividends of Rs 72,200, how much is net income (loss)?
(5) If net income is Rs 6,600 and dividends are Rs 15,400, how much is new common stock?
(6) If the company issues common stock of Rs 39,600 and net income is Rs 18,900, how much is dividends?
(7) If the company issues common stock of Rs 83,200 and pay dividends of Rs 2,400, how much is net income (loss)?
[Answer: (1) 18,000; (2) 66,000; (3) 48,000; (4) 101,000;
(5) 56,800; (6) 10,500; (7) (32,800) loss]
SOLUTION
(1) What is the beginning equity?
(a) Beginning equity
Beginning equity |
= |
Assets – Liabilities |
|
= |
54,000 – 36,000 |
|
= |
Rs 18,000 |
(2) What is the ending equity?
Ending equity |
= |
Assets – Liabilities |
|
= |
124,000 – 58,000 |
|
= |
Rs 66,000 |
(3) What is the increase in equity?
|
Increase in equity |
= |
Ending equity – Beginning equity |
|
|
= |
66,000 – 18,000 |
|
|
= |
Rs 48,000 |
(4) If the company issues common stock of Rs 19,000 and pay dividends of Rs 72,200, how much is net income (loss)?
Net income or loss
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
66,000 |
= |
18,000 + Net income – 72,200 + 19,000 |
66,000 |
= |
Net income – 35,000 |
66,000 + 35,000 |
= |
Net income |
Net income |
= |
Rs 101,000 |
(5) If net income is Rs 6,600 and dividends are Rs 15,400, how much is new common stock?
New common stock
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
66,000 |
= |
18,000 + 6,600 – 15,400 + New common stock |
66,000 |
= |
9,200 + New equity |
New common stock |
= |
66.000 – 9,200 |
|
= |
Rs 56,800 |
(6) If the company issues new equity of Rs 39,600 and net income is Rs 18,900, how much is dividends?
Dividend paid
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
66,000 |
= |
18,000 + 18,900 – Dividend + 39,600 |
66,000 |
= |
76,500 – Dividend |
Dividend |
= |
76,500 – 66.000 |
|
= |
Rs 10,500 |
(7) If the company issues new equity of Rs 83,200 and pay dividends of Rs 2,400, how much is net income (loss)?
Income or loss
Ending equity |
= |
Beginning equity + Net Income – Dividend + New common stock |
66,000 |
= |
18,000 + Net income – 2,400 + 83,200 |
66,000 |
= |
98,800 + Net income |
66,000 – 98,800 |
= |
Net income |
Net income (loss) |
= |
Rs (32,800) |
#######
Click on link for YouTube videos topic wise : |
|
Accounting Equation |
|
Basic Journal Entries in Nepali |
|
Basic Journal Entries |
|
Journal Entry and Ledger |
|
Ledger Account |
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Subsidiary Book |
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Cash Book |
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Trial Balance and Adjusted Trial Balance |
|
Bank Reconciliation Statement (BRS) |
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Depreciation |
|
Click on link for YouTube videos chapter wise: |
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
|
Accounting for Long Lived Assets |
|
Analysis of Financial Statement |
#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1A
ABC Company Ltd has beginning equity Rs 336,000. At the end of accounting years, the firm has assets Rs 500,000 and liabilities Rs 50,000. The firm has earned Rs 150,000 net income during the year.
Required: (a) Ending equity; (b) Dividend paid for the year
[Answer: (a) 450,000; (c) 36,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1B
ABC Traders has beginning assets Rs 100,000 and liabilities Rs 50,000. During the year, the company distributed dividend Rs 20,000. At the end of the year, the company has doubled its assets and liabilities.
Required: Net income earned by firm
[Answer: 70,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1C
Bajaj Company Ltd has beginning assets and liabilities Rs 250,000 and Rs 120,000 respectively. During the year, company increases its shareholder’s equity to Rs 200,000; and paid dividend Rs 30,000.
Required: Net income of the company during the year
[Answer: 100,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 1D
CK Company doubles the amount of its assets from the beginning to the end of the year. Liabilities at the end of the year are Rs 150,000. The share capital, net income and dividends amount to Rs 100,000, Rs 70,000 and Rs 20,000 respectively.
What is the amount of its assets at the beginning of the year?
[Answer: 150,000]
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