Accounting Equation Problems and Solutions - Balance Sheet Eq. - Free Printable

The image you've provided is a statement of the accounting equation for an entity named Habib Ullah Sadiq, showing changes in Assets and Equities over a series of transactions (i to ix). The goal is to verify that the accounting equation holds true at each step:

> Assets = Liabilities + Owner's Equity

Let’s analyze and explain each transaction, ensuring that the Accounting Equation remains balanced after every step.

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🔍 Understanding the Table Structure

| S.No | Assets | | | | Equities | |
|------|----------------------------|------------------|------------------|------------------|------------------------|---------|
| | Cash | Land | A/C Receivables | Furniture | A/C Payable | O.E. |

- O.E. = Owner's Equity
- A/C Payable = Accounts Payable (Liability)
- Bal = Balance after each transaction

We'll go through each transaction and explain what happened.

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✔ Initial State (Before any transactions)

But from Transaction i, we start with:
- Cash: Rs. 200,000
- Land: Rs. 50,000
- O.E.: Rs. 25,000

Wait — this doesn’t balance:
> Assets = 200,000 + 50,000 = Rs. 250,000
> Equity = O.E. = Rs. 25,000 → Not equal!

But look at the Balance row after transaction (i):
- Total Assets = 250,000
- Total Equity = 250,000 (O.E.)

So it seems like the initial capital investment was Rs. 250,000, but only Rs. 25,000 is shown as O.E. That can't be right.

Wait — let’s re-express:

Actually, the first line (i) shows:
- Cash: +200,000
- Land: +50,000
- O.E.: +25,000

But that would mean assets increased by 250,000, but equity only increased by 25,000 — which is impossible unless there's a mistake.

But then the "Bal" row after (i) shows:
- Assets: 200,000 (Cash) + 50,000 (Land) = 250,000
- O.E.: 250,000

So clearly, O.E. was credited with 250,000, not 25,000.

There's a typo in the table.

Let’s fix this:

> Transaction (i): Owner invests Rs. 250,000 in business — cash and land.
> - Cash: +200,000
> - Land: +50,000
> - O.E.: +250,000

✔ So the O.E. should be +250,000, not +25,000.

But in the table, it says +25,000 under O.E., but the balance is 250,000.

This suggests either:
1. A typo in the "transaction" line, or
2. The O.E. column is cumulative.

Looking carefully:

After (i), O.E. is 250,000, so likely:
- The "25,000" in the transaction row is a mistake.
- It should be +250,000.

But wait — the next transaction (ii) reduces O.E. by 80,000 → O.E. becomes 170,000.

So if O.E. starts at 250,000 and drops by 80,000 → 170,000 → matches.

So yes, O.E. must have been 250,000 initially, meaning the entry in (i) under O.E. should be +250,000, not +25,000.

Likely a typo in the table.

Let’s proceed assuming that the initial capital is Rs. 250,000, and the O.E. change in (i) is actually +250,000.

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Now let's go step by step.

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📌 Transaction-by-Transaction Analysis

#### (i) Initial Investment
- Cash: +200,000
- Land: +50,000
- O.E.: +250,000

→ Owner brings in assets worth 250,000 (cash + land) in exchange for ownership.

✔ Assets = 250,000; Equity = 250,000 → Balanced.

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#### (ii) Withdrawal of Cash
- Cash: –80,000
- O.E.: –80,000

→ Owner withdraws cash for personal use.

✔ Assets ↓80k, Equity ↓80k → Still balanced

New balances:
- Cash: 120,000
- Land: 50,000
- Total Assets: 170,000
- O.E.: 170,000

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#### (iii) Cash Received from Sale/Revenue?
- Cash: +25,000
- O.E.: +25,000

→ Business earns revenue (e.g., sale of goods/services), increasing both cash and owner's equity.

✔ Assets ↑25k, Equity ↑25k → Balanced

Total:
- Cash: 145,000
- Land: 50,000
- Total Assets: 195,000
- O.E.: 195,000

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#### (iv) Purchase on Credit
- A/C Payable: +50,000
- O.E.: –50,000

Wait — this is unusual.

Typically, when you buy something on credit, you increase an asset (e.g., furniture) and increase liability (A/C Payable).

But here:
- No asset is increased.
- A/C Payable ↑50,000
- O.E. ↓50,000

That implies:
→ Business incurred a liability (owed someone 50,000) and reduced owner’s equity?

That could happen if:
- The business took a loan from the owner (but then it would be O.E. ↑)
- Or perhaps an expense was recorded, reducing equity, and payable created.

But no expense is shown.

Wait — Furniture is blank.

But look at transaction (vi): Furniture ↑5,000

And (viii): Furniture ↓1,500

But no purchase of furniture yet.

Ah! Here’s the issue.

In (iv):
- A/C Payable ↑50,000
- O.E. ↓50,000

But no asset is recorded.

That can’t be right.

But the balance after (iv) shows:
- A/C Payable: 50,000
- O.E.: 145,000 (was 195,000 → now 145,000)

So O.E. decreased by 50,000 → maybe expense recognized?

But no expense account exists.

Alternatively, maybe the business bought furniture on credit, but the asset side is missing.

But Furniture column is blank in (iv).

Wait — Furniture appears only in (vi), (vii), (viii).

So likely, (iv) is not a purchase.

Let’s reconsider.

Maybe (iv) is a loan taken from owner? But then O.E. should increase, not decrease.

Or owner withdrew 50,000, but then O.E. ↓ and A/C Payable ↑?

No — that doesn’t make sense.

Wait — perhaps (iv) is not a transaction but a correction?

But no.

Alternative interpretation:

Perhaps (iv) is purchase of furniture on credit, but the asset side is missing.

But the table has Furniture column, and it’s empty in (iv).

But after (iv), Furniture is still zero.

Then in (vi): Furniture ↑5,000 → so where did it come from?

Wait — maybe (iv) is not a purchase.

Let’s check total assets and equities.

After (iv):
- Assets: Cash 145,000 + Land 50,000 = 195,000
- Liabilities: A/C Payable 50,000
- O.E.: 145,000
- Total Equity: 50,000 + 145,000 = 195,000

✔ Balanced.

So even though Furniture is not listed, the asset total is correct.

But why is Furniture not updated?

Wait — perhaps (iv) is purchase of furniture for Rs. 50,000 on credit, but the Furniture column is left blank?

But then in (vi), only 5,000 is added.

That doesn’t add up.

Unless (iv) is not a purchase.

Another idea: Maybe (iv) is a bill received for services used, e.g., utility expense.

So:
- Expense incurred → O.E. ↓50,000
- A/C Payable ↑50,000

Yes — that makes sense.

So (iv): Recognized expense (e.g., electricity, rent) of Rs. 50,000 on credit.

→ Reduces owner’s equity (since expenses reduce net income), increases liability.

✔ So:
- A/C Payable ↑50,000
- O.E. ↓50,000

No asset involved.

So Furniture not affected.

Makes sense.

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#### (v) Customer Pays
- A/C Receivables: +12,000
- O.E.: +12,000

→ Customer pays for goods sold earlier (on credit).

But A/C Receivables ↑ → asset increases

O.E. ↑ → revenue recognized?

But usually, when customer pays, cash increases, receivables decrease.

Here:
- A/C Receivables ↑12,000 → means sale made on credit
- O.E. ↑12,000 → revenue recognized

But no cash is mentioned.

So this is likely a credit sale.

But then why is O.E. ↑?

Yes — revenue increases equity.

So:
- A/C Receivables ↑12,000 (asset)
- Revenue ↑12,000 → O.E. ↑12,000

✔ Balanced.

Total Assets: 145,000 (Cash) + 50,000 (Land) + 12,000 (Receivables) = 207,000

But wait — previous total was 195,000 (Cash 145k + Land 50k)

Now: 145k + 50k + 12k = 207,000

But O.E. is 157,000, A/P 50,000 → Total Equity = 207,000

✔ Yes, balanced.

So (v) is a credit sale of Rs. 12,000.

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#### (vi) Purchase Furniture for Cash
- Cash: –5,000
- Furniture: +5,000

→ Bought furniture for cash.

✔ Asset shifted from cash to furniture.

No change in equity.

Total Assets unchanged.

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#### (vii) Customer Payment
- Cash: +10,000
- A/C Receivables: –10,000

→ Customer pays for previous credit sale.

So:
- Cash ↑10,000
- Receivables ↓10,000

Net effect: no change in total assets.

✔ Balanced.

Note: O.E. unchanged.

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#### (viii) Depreciation or Repair?
- Cash: +1,500
- Furniture: –1,500

→ Cash paid to repair or maintain furniture?

But usually, repairs are expenses, not reduction of asset.

If it's depreciation, it's not cash.

But here, cash is paid, and furniture decreases.

So perhaps old furniture disposed?

But it says “–1,500” in Furniture, and “+1,500” in Cash.

So likely:
→ Sold old furniture for Rs. 1,500 cash.

But then Furniture ↓1,500, Cash ↑1,500

→ No gain/loss recorded? But O.E. unchanged.

So no profit → book value of furniture was exactly 1,500.

So sale of furniture at book value.

✔ Balanced.

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#### (ix) Payment to Creditor
- Cash: –3,000
- A/C Payable: –1,500
- O.E.: –1,500

Wait — A/P ↓1,500 → paid off part of debt

But Cash ↓3,000 → paid more than liability?

And O.E. ↓1,500 → why?

This is inconsistent.

Let’s see:

- A/P ↓1,500 → liability reduced
- Cash ↓3,000 → cash outflow
- O.E. ↓1,500 → equity reduced

But cash outflow > liability reduction, so where did the extra 1,500 go?

Unless there’s a loss or expense.

But no expense is shown.

Alternatively, perhaps interest paid?

But not specified.

Wait — maybe the payment includes interest, and the interest expense reduces O.E.

So:
- A/P ↓1,500 (principal paid)
- Interest expense: 1,500 → O.E. ↓1,500
- Cash ↓3,000

✔ So total:
- Assets ↓3,000
- Liabilities ↓1,500
- Equity ↓1,500

→ Total Equity = 51,500 (A/P) + 152,500 (O.E.) = 204,000

Total Assets: 148,500 + 50,000 + 2,000 + 3,500 = 204,000

✔ Balanced.

So likely, payment of Rs. 3,000: Rs. 1,500 to clear payable, Rs. 1,500 for interest (expense).

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✔ Final Verification

Let’s check final totals:

| Assets | Amount (Rs.) |
|-----------------------|--------------|
| Cash | 148,500 |
| Land | 50,000 |
| A/C Receivables | 2,000 |
| Furniture | 3,500 |
| Total Assets | 204,000 |

| Equities | Amount (Rs.) |
|-----------------------|--------------|
| A/C Payable | 51,500 |
| O.E. | 152,500 |
| Total Equity | 204,000 |

✔ Balanced!

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🧾 Summary of Transactions

| S.No | Description | Effect |
|------|----------------------------------------------|------------------------------------------------------------------------|
| i | Owner invests Rs. 250,000 (200k cash, 50k land) | Assets ↑250k, O.E. ↑250k |
| ii | Owner withdraws Rs. 80,000 cash | Cash ↓80k, O.E. ↓80k |
| iii | Earned revenue (cash) | Cash ↑25k, O.E. ↑25k |
| iv | Incurred expense on credit (e.g., utilities) | A/P ↑50k, O.E. ↓50k |
| v | Made credit sale of Rs. 12,000 | A/R ↑12k, O.E. ↑12k |
| vi | Bought furniture for Rs. 5,000 cash | Cash ↓5k, Furniture ↑5k |
| vii | Collected Rs. 10,000 from customer | Cash ↑10k, A/R ↓10k |
| viii | Sold old furniture for Rs. 1,500 cash | Cash ↑1.5k, Furniture ↓1.5k |
| ix | Paid Rs. 3,000: Rs. 1,500 principal + 1,500 interest | Cash ↓3k, A/P ↓1.5k, O.E. ↓1.5k (interest expense) |

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✔ Conclusion

- The accounting equation holds true at every step.
- Final totals: Rs. 204,000 = Rs. 204,000
- All transactions are properly reflected.
- The only discrepancy is in (i): O.E. should be +250,000, not +25,000 — likely a typo in the table.

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📝 Final Answer:

> The accounting equation is maintained throughout all transactions. The final total of Assets (Rs. 204,000) equals the sum of Liabilities (Rs. 51,500) and Owner's Equity (Rs. 152,500), confirming balance. Each transaction follows the double-entry principle, ensuring accuracy. A minor error exists in transaction (i) where Owner's Equity should be +250,000, not +25,000, but the balance row correctly reflects the total.

✔ Problem solved and verified.