Expanded Accounting Equation: Service Firm Sole Proprietorship

 

Service Providing Firm and Accounting Equation

Service providing firm or person provides different services like legal, real estate rent, communications, storage, processing etc.

Service providers do not sell products; therefore, there are not:

Purchase of goods and purchase return.

Sales of goods and sales return.

Suppliers or creditors.

 

There are different types of firms or companies.

But we categorize them only two in accounting equation; they are:

(a) Sole Proprietorship Firm or Partnership Firm

(b) Limited Liabilities Company or Public Limited Company or Incorporation.

 

Types of service providers

Application service provider Audit service provider Cleaning service provider Cloud storage service provider Commission based service provider Cyber security service provider Data storage service provider Gardening service provider Internet service provider Legal service provider Management service provider Motivation service provider

Network service provider Online service provider  Party or concert organizers Payment service provider Pest control service provider Security service provider Software service provider Software service provider in cloud computing Taxation service Telecommunications service provider Website development service provider Website hosting and domain provider etc.

 

PROBLEM: 9

EP Online Study, sole proprietorship, has the following transaction for the month of April:

(a) Invested cash to start business Rs 50,000.

(b) Promissory note issued to take loan Rs 20,000.

(c) Equipment purchased in cash Rs 8,000.

(d) Equipment purchased on account Rs 15,000.

(e) Service provided in cash Rs 25,000.

(f) Service provided on account Rs 8,000.

(g) Service revenue received in advance Rs 13,000.

(h) Office expenses paid Rs 2,000.

(i) Office supplies purchased worth Rs 1,500.

(j) Office supplies purchased on account (credit) Rs 800

(k) Utility bill paid Rs 500

(l) Dividend distributed Rs 1,500.

Required: Accounting equation in expended form

[Answer:  Assets = 64,500; 23,000; 8,000; 2,300;

Owner’s equity = 49,000; Liabilities = 15,800; 20,000; 13,000]

SOLUTION

(a) Invested cash to start business is Rs 50,000.

Analyse: In sole proprietorship business, a person invests cash into business.

Business starting increases bank as well as owner’s equity (capital).

 

(b) Promissory note issued to take loan Rs 20,000.

Analyse: When capital (owner’s equity) is not sufficient, business takes loan.

Loan increases bank balance as well as liabilities (loan).

 

(c) Equipment purchased in cash Rs 8,000.

Analyse: equipment is asset for the organization; it helps to generate profit.

Equipment increases fixed assets but decreases bank.

 

(d) Equipment purchased on account Rs 15,000.

Analyse: equipment is asset for the organization; on account means on credit.

Equipment increases fixed assets and credit purchase also decreases liabilities (A/P).

 

(e) Service provided in cash Rs 25,000.

Analyse: service revenue is the major income for service providing organization.

Service revenue in cash increases bank as well as owner’s equity (capital).

 

(f) Service provided on account Rs 8,000.

Analyse: service provided on account means on credit; amount will be received later.

Credit service increases account receivable as well as owner’s equity

 

(g) Service revenue received in advance Rs 13,000.

Analyse: Service revenue received in advance is liability for the organization.

Advance income increases bank as well as liabilities.

 

(h) Office expenses paid Rs 2,000.

Analyse: office expenses are regular operating expenses for the organization.

Expenses decreases bank as well as owner’s equity (capital).

 

(i) Office supplies purchased worth Rs 1,500.

Analyse: office supplies are regular office expenses such as stationery; they make easy to work.

Purchasing of office supplies decrease cash but increases office supplies.

Unused office supplies are the part of current assets.

 

(j) Office supplies purchased on account (credit) Rs 800

Analyse: office supplies purchase on credit increases office supplies as well as account payable.

 

(k) Utility bill paid Rs 500

Analyse: utility bill means expenses related to electricity, water, gas, telephone, mobile, internet, cable TV etc.

Utility bill decreases bank as well as owner’s equity.

 

(l) Dividend distributed Rs 1,500.

Analyse: limited company pays dividend to its shareholders.

Dividend distributed decreases bank as well as owner’s equity.

 

Accounting Equation

Particulars		ASSETS							=	OWNER’S EQUITY		+	LIABILITIES
		Bank	+	Equip	+	A/R	+	Supplies		Capital			A/P	+	Loan	+	Advance
a	Invested into business	20,000	+	0	+	0	+	0	=	20,000		+	0	+	0	+	0
	First equation	20,000	+	0	+	0	+		=	20,000			0	+	0		0
b	Loan taken	+20,000		0		0				0			0		+20,000		0
	New equation	40,000	+	0	+	0	+	0	=	20,000		+	0	+	20,000	+	0
c	Equipment  (cash)	(8,000)		+8,000													0
	New equation	32,000	+	8,000	+	0	+	0	=	20,000		+	0	+	20,000	+	0
d	Equipment (on account)	0		+15,000	+	0				0			+15,000		0		0
	New equation	32,000	+	23,000	+	0	+	0	=	20,000		+	15,000	+	20,000	+	0
e	Service provided in cash	25,000		0		0				25,000	rev		0		0		0
	New equation	57,000	+	23,000	+	0	+		=	45,000		+	15,000	+	20,000	+	0
f	Service provided on credit	0		0		+8,000				+8,000	rev		0		0		0
	New equation	57,000	+	23,000	+	8,000	+	0	=	53,000		+	15,000	+	20,000	+	0
g	Service revenue (advance)	+13,000		0		0				0			0		0		+13,000
	New equation	70,000	+	23,000	+	8,000	+	0	=	53,000		+	15,000	+	20,000	+	13,000
h	Office expenses paid	(2,000)								(2,000)	exp
	New equation	68,000	+	23,000	+	8,000	+		=	51,000		+	15,000	+	20,000	+	13,000
i	Office supplies purchased	(1,500)		0		0		1,500		0			0		0		0
	New equation	66,500	+	23,000	+	8,000	+	1,500	=	51,000		+	15,000	+	20,000	+	13,000
j	Office supplies (credit)	0		0		0		+ 800		0			+800		0		0
	New equation	66,500	+	23,000	+	8,000	+	2,300	=	51,000		+	15,800	+	20,000	+	13,000
k	Utility bill paid	(500)		0		0		0	=	(500)	exp		0		0		0
	New equation	66,000	+	23,000	+	8,000	+	2,300	=	50,500		+	15,800	+	20,000		13,000
l	Dividend distributed	(1,500)		0		0		0		(1,500)	div		0		0		0
	Final equation	64,500	+	23,000	+	8,000	+	2,300	=	49,000		+	15,800	+	20,000		13,000

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Click on link for YouTube videos topic wise :
Accounting Equation	http://tiny.cc/c89jkz
Basic Journal Entries in Nepali	http://tiny.cc/uaakkz
Basic Journal Entries	http://tiny.cc/8aakkz
Journal Entry and Ledger	http://tiny.cc/caakkz
Ledger Account	http://tiny.cc/haakkz
Subsidiary Book	http://tiny.cc/399jkz
Cash Book	http://tiny.cc/889jkz
Trial Balance and Adjusted Trial Balance	http://tiny.cc/c59jkz
Bank Reconciliation Statement (BRS)	http://tiny.cc/q59jkz
Depreciation	http://tiny.cc/ugakkz
Click on link for YouTube videos chapter wise:
Financial Accounting and Analysis (All videos)	http://tiny.cc/jlersz
Accounting Process	http://tiny.cc/mlersz
Accounting for Long Lived Assets	http://tiny.cc/plersz
Analysis of Financial Statement	http://tiny.cc/slersz

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Keep in mind

In sole proprietorship and partnership firm, business start becomes owner’s equity. Expenses, income, loss and profit are adjusted with owner’s equity. —– In and limited liabilities company (LLC), public limited company (PLC) and joint stock company (JSC), Incorporation (Inc.), business start becomes shareholders’ equity. Expenses, income, loss, profit and dividend are recorded separately in retained earnings (RE) account.

 

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PROBLEM AND ANSWERS

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

PROBLEM: 9A              Service Firm Owner’s Equity

EP Audit Firm established to provide audit service; it has following financial data: (all transactions made through cheque)

Aug 5, Received capital from the owner Rs 200,000.

Aug 8, Legal and registration fee paid Rs 6,500.

Aug 9, Computer and printer (equipment) purchased for Rs 54,000.

Aug 10, Miscellaneous office supplies purchased on account for Rs 3,500.

Aug 11, Signed a one year promissory note with the bank for Rs 75,000.

Aug 15, Laptop purchased for Rs 52,500.

Aug 16, Billed a client for the service for Rs 20,000; agreement is that 25% bill amount must be paid within 5 days and remaining within 30 days.

Aug 18, Commission received from referred job Rs 13,500.

Aug 20, Payment received from client 25% of bill amount.

Aug 28, Utilities (electricity, internet and water) bills paid for Rs 7,000.

Aug 29, Salary paid to staff Rs 16,500.

Aug 31, Office rent payable Rs 12,000.

Required: Accounting equation in expended form

[Answer:  Assets = 153,250; 106,250; 3,500; 15,000;

Owner’s equity = 191,000; Liabilities = 75,000; 12,000]

 

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