Expanded Accounting Equation: Drawings, Loss by Fire, Free Sample

Drawings, Goods Loss by Fire, Loss by Theft, Free Sample, Insurance Claim in Expanded Accounting Equation

Drawings or withdrawals 

Sometimes owner or proprietor of the business takes (withdrawal) money or goods from business his personal, private or domestic use; it is known as drawings or withdrawals.

The uses of business assets for domestic purposes are also considered as drawings.

If cash is taken, it is deducted from cash as well as capital.

If goods are taken, it is deducted from cash and purchase (stock).

Goods or stock loss by fire or theft

It is possible to goods loss by fire or theft in the showroom.

Sometimes it may be possible to loss goods by accident, fire or theft.

This loss is abnormal loss in nature.

If goods are not insured, it is total loss to organization; this loss is deducted from purchase (stock).

If goods are insured, insurance company may accept full claim of this loss; it increases asset.

If goods are insured, insurance company may accept partial claim of this loss; claim increases asset but loss decreases capital.

Goods distribution as free sample, charity or donation

A company can distribute some goods as free samples to the customers for promotion of business.

Free sample of products is promotion or advertisement.

Sometimes organization can give goods as charity or donation for religious and social help purpose.

Goods given as free sample, charity or donation is deducted from purchase (stock) and this amount is also deducted from capital.

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

PROBLEM: 4

SK Traders has following information:

(a) Business started with cash Rs 50,000 and stock Rs 170,000.

(b) Goods sold costing Rs 90,000 for Rs 120,000.

(c) Goods worth Rs 5,000 and cash Rs 2,000 taken by proprietor for personal use.

(d) Goods distributed as free sample Rs 2,300.

(e) Goods worth Rs 3,700 loss by theft.

(f) Goods worth Rs 8,000 loss by fire but insurance company accepted claim only Rs 6,500.

Required: Accounting equation in expanded form

[Answer: Assets = Rs 335,500; Capital = Rs 335,500; Liabilities = Nil]

SOLUTION:

Explanation:

(a) Cash and stock are assets. Their total is capital.

(b) Cash increases by 120,000; stock decreases by 90,000; profit 30,000 is added with capital.

(c) Personal use is drawings; stock decreases by 5,000 and cash decreases by 2,000; as withdrawal 7,000 is deducted from capital.

(d) Free sample is advertisement; stock decreases by 2,300 and same amount is deducted from capital.

(e) Loss by theft decreases stock by 3,700; it is loss so it is deducted from capital.

(f) Insurance claim 6,500 increases assets but stock 8,000 decreases assets; balance 1,500 is loss, it is deducted from capital.

Accounting Equation

Alternatively

Accounting Equation

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

PROBLEM: 4A

ABC Traders has following extracted data:

(a) Business commenced with cash Rs 80,000 and bank balance Rs 60,000.

(b) Goods purchased of Rs 45,560 from AB Supplier and made partial payment of Rs 10,560.

(c) Goods purchased for cash Rs 5,650 and by cheque Rs 9,350.

(d) Purchased of goods from Akbar Rs 12,200 and by cheque Rs 15,300

(e) Goods stolen by theft worth Rs 1,400.

(f) Goods taken for private use worth Rs 2,380.

(g) Goods distributed as free sample Rs 1,620.

(h) Damaged goods returned to Akbar Rs 1,200.

Required: Expanded accounting equation

[Answer: Assets = 63,790; 35,350; 81,460; Capital = 134,600; Liabilities = 46,000]

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