December 7, 2021

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The Accounting Equation examples and solutions

The Accounting Equation examples and solutions
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The accounting equation means assets are equal to capital plus liabilities. Assets are the properties of a business. Capital or owner’s equity is the money used by the businessman to start a business. And liabilities are debts used to run the business.

Capital will be used to buy assets such as inventories, properties, plants, equipment, and the remaining capital will be kept as cash in hand or at the bank. Liabilities are used in the same ways capital is used. Therefore, when you add up the amount contributed by the owner and that borrowed by the owner. The result is the assets the business owns.

Therefore, we can use the accounting equation to find missing items. For example, if the owner cannot remember the amount used to start the business. We can calculate all the business assets and liabilities. Then we use the equation Capital = Assets – Liabilities. If the total firm’s assets are not known, we can simply say the value of the Asset is the addition of capital and liabilities. Let us give an example to explain this.

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Question on Accounting Equation

Tobi can’t remember the amount he used to start her business. So, she asked you to help her find out the amount. You requested an investigation to know our assets and liabilities. On your investigation, you discovered the following:

The total inventory in stock worth N570,000
Furniture and fittings are valued as N843,000 as of the date
The rent value remaining unused is 140,000
Tobi is owing to a total of 750,000 to creditors, banks, and other service providers
There is N130,000 in her Facebook ads account
A sum of N245,000 has not been collected from people owing Tobi and
Tobi has N201,000 cash in hand and at the bank

With the above information, what is Tobi’s capital?

The solution to the Accounting Equation Question

The first step is to write out the formula for the accounting equation. That is;

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ASSETS = CAPITAL + LIABILITIES

Here, we are interested in the capital, so rewrite the equation as:

CAPITAL = ASSETS – LIABILITIES

From the question, assets include the following:

Inventory = N570,000
Furniture and fittings = N843,000
Unused rent = N140,000
Unused Facebook ads = N130,000
Debtors = N245,000
Cash and bank balance = N201,000

Next is to know the total assets figure which is N2,129,000

But the liability is N750,000.

Therefore the Capital = N1,379,000

The Google Sheet Screenshot below explains how the capital value is computed.

The Accounting Equation examples

Conclusion

The accounting equation is a powerful tool in accounting. Similar to the double-entry principle. It can be substituted for the double-entry principle. And used in one of the rules of the principle. In the above example, we used it to compute capital. However, the formula can be used to calculate liabilities or assets if they are unknown.

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