Notes
Basic Financial Statements
Qno.1 How business transactions affect the accounting equation (Assets = Liabilities +
Owner’s Equity)?
Ans: business transactions affect the accounting equation Assets = Liabilities +
Owner’s Equity in various ways. Each transaction must maintain the balance of this
equation, meaning the total value of assets must always equal the combined value of
liabilities and owner’s equity.
Example No 1.
The business buys equipment for $5,000 in cash.
● Assets: Increase in equipment (asset) by $5,000 and a decrease in cash (asset)
by $5,000.
● Liabilities: No change.
● Owner’s Equity: No change.
Result: The overall assets remain the same, but the specific composition of assets
changes.
Example No 2.
Increase in Liabilities (e.g., Borrowing Money)
The business borrows $10,000 from a bank.
● Assets: Increase in cash (asset) by $10,000.
● Liabilities: Increase in loan payable (liability) by $10,000.
● Owner’s Equity: No change.
Result: Both assets and liabilities increase by the same amount, maintaining the balance.
Example No 3.
Increase in Owner’s Equity (e.g., Owner Investment)
The owner invests $15,000 in cash into the business
○ Assets: Increase in cash (asset) by $15,000.
○ Liabilities: No change.
Basic Financial Statements
Qno.1 How business transactions affect the accounting equation (Assets = Liabilities +
Owner’s Equity)?
Ans: business transactions affect the accounting equation Assets = Liabilities +
Owner’s Equity in various ways. Each transaction must maintain the balance of this
equation, meaning the total value of assets must always equal the combined value of
liabilities and owner’s equity.
Example No 1.
The business buys equipment for $5,000 in cash.
● Assets: Increase in equipment (asset) by $5,000 and a decrease in cash (asset)
by $5,000.
● Liabilities: No change.
● Owner’s Equity: No change.
Result: The overall assets remain the same, but the specific composition of assets
changes.
Example No 2.
Increase in Liabilities (e.g., Borrowing Money)
The business borrows $10,000 from a bank.
● Assets: Increase in cash (asset) by $10,000.
● Liabilities: Increase in loan payable (liability) by $10,000.
● Owner’s Equity: No change.
Result: Both assets and liabilities increase by the same amount, maintaining the balance.
Example No 3.
Increase in Owner’s Equity (e.g., Owner Investment)
The owner invests $15,000 in cash into the business
○ Assets: Increase in cash (asset) by $15,000.
○ Liabilities: No change.
