Accounting

TOPIC 3: WORKED EXAMPLES

So far, we have looked only at the SOFP. We now need to consider how to record and report Income Statement items.

Recall the basic accounting equation is:

Assets = Liabilities + Equity

Recall that: Net Income = Revenue – Expenses

Net Income goes to Equity holders so the basic accounting equation can be shown now as:

Assets = Liabilities + Equity + Net Income

So that:

Assets = Liabilities + Equity + Revenue – Expenses

For recording purposes only, we can re-state this as:

Assets + Expenses = Liabilities + Equity + Revenue

The above is known as the Extended Accounting Equation.

Example 3.1

HORSE Company is a new enterprise which was formed on 1 July 20X1. The following transactions took place in July.

* Show how each of the following transactions impact the extended accounting equation (Assets + Expenses =Liabilities +Equity + Revenue )

(i) The directors of HORSE company invested €10,000 cash in the business. In total, they received 100 $100 shares (par value) in return. The authorised share capital of the business is 300 shares

(ii) Bought property for $3000 cash

(iii) Purchased 500 units of Inventory for €10 per unit on account

(iv) Sold 150 units of Inventory for €20 per unit – received cash.

(v) Paid electricity bill for €200 cash

(vi) Paid rent of €300 cash

(vii) Sold 100 units of Inventory for €30 per unit – on account.

| Assets | Expenses | Liabilities | Equity | Revenue |

(i) | | | | | |

(ii) | | | | | |

(iii) | | | | | |

(iv).I | | | | | |

(iv). II | | | | | |

(v) | | | | | |

(vi) | | | | | |

(vii).I | | | | | |

(vii). II | | | | | |

* Draw up a list showing the balances on each of the individual assets, expenses, equity, liabilities and revenue accounts.

* Draw up a classified Income Statement for the month ended July 20X2 and a Statement of Financial Position at 31...