Accounting Equation, Double Entry System & Accounting Concepts - Unit 02 - Accounting Equation, Double Entry System & Accounting Concepts

Oct 23, 2026

Unit 02 explains the accounting equation and its role in double entry accounting, starting from entity concept and moving to the elements of accounting: assets, liabilities, equity, income, and expenses. It derives multiple forms of the basic accounting equation and shows how profit or loss is calculated using income minus expenses and changes in capital. The unit includes several exercises that classify information into current/non-current assets and liabilities, compute capital balances, and determine the impact of transactions on the accounting equation across January and March 2016 examples, including income statement preparation.

LanguageEnglish

CategoryExam

FormatPDF

Pages32

Reading Time1 h 21 min

AccessFree to download

Entity Concept

Elements of Accounting

Accounting Equation

Deriving the Basic Accounting Equation

Calculation of Profit/Loss

Exercises

Exercise 01

Exercise 02

Exercise 03

Exercise 04

Exercise 05

Past Papers: Accounting Equation and Profit Equation

Accounting Equation,Double Entry System &Accounting Concepts AAT LevellFAC-Financial Accounting Nuwan KalupahanaBBA.(Finance)Sp.(UOC),CA Finalist 6C5Gaó aedaa6咖oasddna)5 Estd.JAYASEKERA MANAGEMENT CENTRE (PVT)LTD ## UNIT 02-AcCOUNTING EQUATION,DOUBLE ENTRY SYSTEM &ACCOUNTING CONCEPTS | | Accounting Equation,Double Entry System and Accounting Concepts,(25%) | | | --- | --- | --- | | 02 | 21 | Entity concept | | | 22 | Elementsof Accounting (including,Assets,Liabilities,income,Expenses and Equity) | | | 23 | Recording Business Transactions in line with Accounting Equation | | | 24 | Dual aspect ofatransaction | | | 25 | Doublo Entry System | | | 26 | Other Accounting Concepts(Coing conce,Periodic,Historical Cost,Money Measurement,
Matching.Accrual,Prudence,Consistency,Realization,Materiality,Substance over-form) | ### 1. ENTITY CONCEPT · The business is treated separate from the owners. · Hence transactions are recorded from the point of view of the firm and notthe owner. · Hence capital is a liability and drawings is an asset. ### 2. ELEMENTS OF ACCOUNTING Assets Liabilities Equity Income Expenses ### 3. AcCOUNTING EQUATION Accounting equation is a simple way to illustrate two facts about a business,which is what a business owns and what it owes. Entire double entry accounting concept is based on the basic accountingequation. · DERIVING THE BASIC ACCOUNTING EQUATION o Assets =Capital o Assets =Capital+Liabilities o Assets =Capital+Profit+Liabilities o Assets =Capital+(Income-Expenses)+Liabilities o Assets +Expenses =Capital+Income+Liabilities o NCA+CA+Expenses =Capital+Income+NCL+CL o Stock+Debtors+Cash +Expenses =Capital+Income+Bank Loan +Creditors ### 4. CALCULATION OF PROFIT/Loss o Profit/Loss=Income-Expenses o Profit/Loss =(Closing Capital-Opening Capital)+Drawings-Additional Capital ### 01. EXERCISE The below information given for an organization. Rs. 1.Motor vehicle300,000 99.Bank balance50,000 2.Machinery200,000 10.Land &building400,000 3.Inventory50,000 11.Cash in hand60,000 4.Debtors/Trade receivables80,000 12.Prepaid telephone3,000 5.Creditors/Trade payables50,000 13.Office equipment12,000 6.Accrued electricity10,000 14.Mortgage loan15,000 7.Advance rent received5,00015.Interest income receivable7,000 8.Bank loan100,00016.Tax payable11,000 ·Distinguish the above information using, a)Non-current assetsc)Non-current liabilities b) Current assetsd)Current liabilities ● Calculate the capital balance ### 02. EXERCISE Below transactions are given for Mahinda's business for the month of January 2016.Show the impact on the accounting equation. | Date | Transaction | Amount | | --- | --- | --- | | 2/1 | Mahinda invested cash | 100,000 | | 3/1 | Purchased amotor vehicle | 45,000 | | 4/1 | Cash purchases | 30,000 | | 5/1 | Cash sales | 48,000 | | 6/1 | Obtained a bank loan | 60,000 | | 7/1 | Repayment of bank loan | 32,000 | | 8/1 | Mahinda's drawings | 50,000 | | 9/1 | Interest income received | 48,000 | | 10/1 | Electricity expenses paid | 16,000 | ### 03. EXERCISE BELOW TRANSACTIONS ARE GIVEN FOR CHAMARI's BUSINESS FOR THE MONTH OFMARCH 2016. Show the impact on the accounting equation. | 9/3 | Discounts allowed | 20,000 | | --- | --- | --- | | 10/3 | Discounts received | 30,000 | | 11/3 | Obtained a bank loan | 400,000 | | 12/3 | Owners drawings | 80,000 | | 13/3 | Paid Bank loan | 200,000 | | 14/3 | Received from debtors | 150,000 | | 15/3 | Paid to creditors | 130,000 | | 16/3 | Electricity paid | 32,000 | | Date | Transaction | Amount | | --- | --- | --- | | 2/3 | Invested Capital | 500,000 | | 3/3 | Cash purchases | 300,000 | | 4/3 | Credit purchases | 700,000 | | 5/3 | Cash sales | 500,000 | | 6/3 | Credit s

FAQs

What is the entity concept in accounting?

The business is treated as separate from the owners, so transactions are recorded from the firm’s perspective rather than the owner’s. Capital is treated as a liability and drawings as an asset.

How is the basic accounting equation derived and used in double entry accounting?

The accounting equation illustrates what a business owns versus what it owes, and the double entry system is based on it. The unit provides multiple derived forms, linking assets, capital, profit, income, expenses, and liabilities.

How do you calculate profit or loss using the given concepts?

Profit or loss can be calculated as income minus expenses. It can also be computed using changes in capital plus the effect of drawings and additional capital introduced.

Oct 23, 2026

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