Financial Accounting I

(Transaction and Accounting Equation)

Week 2

Course Instructor:
Muhammad Asim Shahzad
1
 Agenda; Week 2
 What is an event?

 Features of an Event?

 Classification

 Rules for cash and credit Transactions

 The Accounting Equation

 Effect of Business Transactions upon the Accounting Equation

 Setting up a New Business

 Excercises
2
 Transaction?
 TRANSACTION
 Any event that changes the financial position of a business
concern and that must be recorded in the books of accounts
is called a “Transaction”.
 Example:
 “Goods purchased” is a transaction.
 “Goods sold” is a transaction.
 “Goods lost by fire” is a transaction
 There are two types of Transactions
 Cash Transactions
 Credit Transactions

3
 Transaction?
 Types of Transaction
 CASH TRANSACTION
 If cash is paid or received immediately as a result of a
transaction, then this transaction is known as “Cash
Transaction”.
 Example: Purchased furniture for cash Rs. 10,000.

 CREDIT TRANSACTION
 If payment or receipt of cash in result of a transaction is
postponed at some future date, then this transaction will be
known as “Credit Transaction”.
 Example: Purchased furniture on credit Rs. 10,000.
4
 Event?
 EVENT
 In simple words we can say that happening of anything is
an event.
 More properly an event can be defined as “Event is an
occurrence, happening change or incident which may or
may not bring any change in the financial position of a
business.”
 Events can be classified into two types:
 Monetary Events
 Non-Monetary Events

5
 Classification of Event?
 MONETARY EVENTS
 Those events which are related with money i.e. which
change the financial position of a person or business are
known as “Monetary Events”.
 Example:Rent paid, Salaries paid, Interest received etc.
 NON-MONETARY EVENTS
 Those events which are not related with money are called
“Non-Monetary Events”.
 Example:Sending price lists to customers.

In Accounting only those events are considered which are related with money and
change the financial position of business.

6
 Transaction/Event
 State with reasons whether the following events are
transactions or not to the business of Mr. A?
 Mr. A started business with cash Rs.100,000.
 Paid salaries to staff Rs.12,000
 Purchased machinery for cash Rs.40,000.
 Placed an order with Ahmad & Co. for goods for Rs.8,000.
 Mr. Ali was appointed as accountant on a salary of
Rs.16,000 per month.
 Received a price list from Mr. B.
 Amount withdrawn by Mr. A for personal use Rs.10,000.
 Received interest from Habib Bank Rs.1,500.
 Received free samples Rs.500.
 There was theft in business office of cash Rs.15,000.
7
 Rules for Cash and Credit Transactions?
 Often students get confused in deciding about the nature of a
transaction i.e. cash or credit. These points can guide those
students.
 Symptoms of Cash Transaction
 All transactions in which the word ‘Paid’ is mentioned are termed as
“Cash Transactions “e.g. Rent paid, Salaries paid etc.
 All transactions in which the words “Cash or Cheque” are used are
termed as “Cash Transactions”. e.g. cash received Rs. 1,000.
 If cash and person’s name both are mentioned then this will be
termed as “Cash Transaction” e.g. goods purchased from Amir for
cash Rs.3,000.
 Sometimes nothing mentioned in transaction but, still it is a “Cash
Transaction” e.g. goods sold for Rs. 4,000.
8
 Rules for Cash and Credit Transactions?
 Symptoms of Credit Transaction
 All transactions in which the words “on credit or on account” are
mentioned are termed as “Credit Transactions” e.g. bought goods on
credit/account Rs. 3,000.
 If a transaction involves the name of a person or firm without
mentioning the word “Cash” then it will be a credit transaction e.g.
sold goods to Amir for Rs.5,000.
 Mr. Imran Started business with cash Rs.200,000.
 He purchased goods for Rs.1,000.
 He purchased goods from Ali for Rs.2,000.
 He purchased goods from Ahsan for cash Rs.5,000.
 He sold goods on credit to Asif for Rs.2,000.
 He sold goods for Rs.5,000.
 He sold goods to Asif for cash Rs.2,500.
9  He paid office Rent Rs.3,000.
 The Accounting Equation?
 Every transaction has two fold aspects. This concept is the basis
for the formation of Accounting Equation, which states that for
every business, assets must be equal to equities.
 Equities may be of two types - the right of owners on the assets of
the business (owner’s equity) and the right of creditors (outsider’s
equity).
 The right of creditors can be represented by the amount payable by
business and the right of owner may be termed as capital or
owners equity. This relationship between assets and equities can
be defined in the form of following Accounting Equation:
 Assets = Equities
• Or
 Assets = Liabilities + Owner’s Equity
10
 The Accounting Equation?
 The above equation explains that assets are the result of
contribution by two entities i.e. the debts by creditors (Liabilities)
and the debts by owner (Capital).
 This equation can also be written as:
 Assets - Liabilities = Capital/Owner’s Equity

11
 The Accounting Equation?
 EFFECTS OF TRANSACTIONS ON ACCOUNTING
EQUATION
 Lets have a look how a transaction can effect the Accounting
Equation;
 Transaction No.1
 Mr. Rehman Commences/Started his business with Cash Rs.1,00,000

 EFFECTS:
 The effects of this transaction will be in result of increase in Cash
(Asset) and increase in Owner’s Equity (Capital).
 Assets = Liabilities + Capital/Owner’s Equity
Cash = Capital
+1,00,000 = +1,00,000
12
 The Accounting Equation?
 Transaction No. 2
 Purchased Machinery for Cash Rs.8,000
 EFFECT:
 This will result in increase in Machinery (Asset) and decrease in
Cash (Asset)

Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000

13
 The Accounting Equation?
 3. Purchased Merchandise for Cash Rs.40,000
 EFFECTS
 This transaction will increase the Goods (Asset) and decrease in Cash
(Asset)
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal 52,000 +8,000 +40,000 +1,00,000

14
 The Accounting Equation?
 4. Purchased Merchandise from Salman for Rs.7,000 on credit.
 EFFECTS
 This transaction will result in an increase in Merchandise Asset and
increase in Creditors.
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
15
 The Accounting Equation?
 Transaction No. 5
 Sold Merchandise for Cash Rs.10,000 which Cost
Rs.8,000
 EFFECTS
 Goods which cost Rs.8,000 have been sold for Rs.10,000,
therefore, a profit of Rs.2,000 is earned by the proprietor,
so it will be added in his capital. On the other hand
Merchandise being sold will be decreased to the extent of
their cost which is Rs.8,000 and there will be an increase
of Rs.10,000 in Cash Asset.
16
 The Accounting Equation?
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
+10,000 -8000 +2000
Bal +62,000 +8000 +39,000 +7000 +102,000

17
 The Accounting Equation?
 Transaction No. 6:
 Sold Merchandise to Maria on Credit of Rs.5,000 which
cost Rs.4,000
 EFFECTS
 This transaction will result in an increase in Debtors
which will be a new inclusion in Assets and a decrease in
Merchandise. Moreover difference between the Sale
Price and Cost (5,000 – 4,000) Rs.1,000 will be added
into the Owner’s Equity.

18
 The Accounting Equation?
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods +Debtors Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
+10,000 -8000 +2000
Bal +62,000 +8000 +39,000 +7000 +102,000
-4000 +5000 +1000
Bal +62,000 +8000 +35,000 +5,000 +7,000 +103,000

19
 The Accounting Equation?
 7. Paid Salman Rs.3,000 as part payment for goods
purchased earlier.
 EFFECTS
 This will not only result in a decrease in creditors but
also a decrease in Cash Asset.
 8. Received Cash from Maira Rs.2,000 to whom
Merchandise were sold on credit earlier.
 EFFECTS
 This will effect the equation by increasing Cash Asset
and decreasing Debtor Asset.
20
 The Accounting Equation?
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods +Debtors Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
+10,000 -8000 +2000
Bal +62,000 +8000 +39,000 +7000 +102,000
-4000 +5000 +1000
Bal +62,000 +8000 +35,000 +5,000 +7,000 +103,000
-3000 -3000
Bal +59,000 +8,000 +35,000 +5,000 +4,000 +103,000
+2,000 -2000
Bal
21 +61,000 +8000 +35,000 +3000 +4,000 +103,000
 The Accounting Equation?
 Transaction No. 9
 Paid salaries Rs.10,000
 EFFECTS
 This transaction will effect the accounting equation in the
shape of decrease in cash and decrease in Owner’s equity.
 Transaction No. 10
 Goods lost by fire Rs.2,000
 This will result in decrease in Merchandise Asset and
Owner’s Equity will also decrease.

22
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods +Debtors Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
+10,000 -8000 +2000
Bal +62,000 +8000 +39,000 +7000 +102,000
-4000 +5000 +1000
Bal +62,000 +8000 +35,000 +5,000 +7,000 +103,000
-3000 -3000
Bal +59,000 +8,000 +35,000 +5,000 +4,000 +103,000
+2,000 -2000
Bal +61,000 +8000 +35,000 +3000 +4,000 +103,000
-10,000 -10,000
Bal +51,000 +8000 +35,000 +3000 +4,000 +93,000
-2000 -2000
Bal +51,000 +8,000 +33,000 +3000 +4000 +91,000
23
 The Accounting Equation?
 Transaction No. 11
 Merchandise costing Rs.1,000 returned by Maira Sales
price being Rs.1,200.
 EFFECTS
 This will affect three items of accounting equation. First
of all Merchandise Asset will increase by Rs.1,000. Then
debtors will decrease by Rs.1,200. Where as owner’s
equity will be decreased by Rs.200.

24
Assets = Liabilities + Owner’s Equity/Capital

Cash +Machinery +Goods +Debtors Creditors +Capital

+1,00,000 +1,00,000
-8,000 +8,000
Bal +92,000 +8,000 +1,00,000
-40,000 +40,000
Bal + 52,000 +8,000 +40,000 +1,00,000
+ 7000 +7000
Bal +52,000 +8,000 +47,000 +7000 +1,00,000
+10,000 -8000 +2000
Bal +62,000 +8000 +39,000 +7000 +102,000
-4000 +5000 +1000
Bal +62,000 +8000 +35,000 +5,000 +7,000 +103,000
-3000 -3000
Bal +59,000 +8,000 +35,000 +5,000 +4,000 +103,000
+2,000 -2000
Bal +61,000 +8000 +35,000 +3000 +4,000 +103,000
-10,000 -10,000
Bal +51,000 +8000 +35,000 +3000 +4,000 +93,000
-2000 -2000
Bal +51,000 +8,000 +33,000 +3000 +4000 +91,000
25 +1000 -1200 -200
Bal +51,000 +8000 +34.000 +1800 +4000 +90,800
 Home Assignments!
 Draw an Accounting Equation of Mr. Ahsan & C0.
 March 01, 2016: Mr. Ahsan started business with cash Rs.4,30,000.
 March 03, 2016 : Paid Rent Rs.10,000.
 March 03, 2016 : Purchased plant for cash Rs.80,000.
 March 07, 2016 : Sold goods to Ali Bros. for Rs. 5,000.
 March 11, 2016 : Goods withdrawn from business for private use by
Mr. Ahsan Rs.5,000.
 March 15, 2016 : Received interest Rs.2,500.
 March 16, 2016 : Purchased goods on Account from Awais worth Rs.
15,000
 March 22, 2016 : Goods returned by Ali for Rs. 500
 March 26, 2016 : Received cash from Ali Rs. 4000
 March 31, 2016 : Deposited in to Bank Rs. 25,000
26
 Home Assignments!
 Show the effects of following transactions on Accounting Equations:
 Mr. Ali started business with the following items:
i) Goods Rs.30,000
ii) Building 1,00,000
iii) Cash Rs.70,000
 He purchased goods on account for Rs.7,000 from Asif.
 He paid Akram Rs.1,000
 He sold goods on account to Imran of Rs.2,000
 Some part of building destroyed by fire Rs.20,000
 Goods returned to supplier Rs.3,000
 He sold goods for Rs.20,000 costing Rs.18,500
 Salaries paid Rs.2,000
 Paid Rent Rs.4,000
 He sold goods to Waseem for Rs.10,000 costing Rs.7,000 on credit basis
27
 Closure of Week 2

28