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CMA Foundation · Paper 2 · English · 5:42
Understanding the Accounting Equation — Lesson 1
Follow assets, liabilities and owner’s equity through eight business transactions, then work through two practice examples.
An introductory accounting lesson shared across the CMA Foundation, Intermediate and Final programme pages. It teaches the accounting equation. Review your selected programme for its wider curriculum and available lessons.
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Use the worked examples below to review the accounting equation, each transaction and the practice answers.
Review the worked example and practice answers
Assets = Liabilities + Owner’s equity
The business is separate from its owner. This simplified sole-proprietor example ignores taxes, depreciation and interest. Owner’s equity includes contributions, profit or loss and drawings; it is not limited to the original investment.
| Transaction | Assets | Liabilities | Owner’s equity |
|---|---|---|---|
| 1. Owner contributes ₹1,00,000 cash | ₹1,00,000 | ₹0 | ₹1,00,000 |
| 2. Equipment bought for ₹30,000 cash | ₹1,00,000 | ₹0 | ₹1,00,000 |
| 3. Inventory bought on credit for ₹20,000 | ₹1,20,000 | ₹20,000 | ₹1,00,000 |
| 4. Bank loan of ₹40,000 received | ₹1,60,000 | ₹60,000 | ₹1,00,000 |
| 5. Supplier paid ₹10,000 | ₹1,50,000 | ₹50,000 | ₹1,00,000 |
| 6. Goods costing ₹10,000 sold for ₹18,000 cash | ₹1,58,000 | ₹50,000 | ₹1,08,000 |
| 7. Rent of ₹5,000 paid | ₹1,53,000 | ₹50,000 | ₹1,03,000 |
| 8. Owner withdraws ₹3,000 for personal use | ₹1,50,000 | ₹50,000 | ₹1,00,000 |
Reconcile the final balances
Cash ₹1,10,000 + equipment ₹30,000 + inventory ₹10,000 = assets ₹1,50,000.
Supplier payable ₹10,000 + bank loan ₹40,000 = liabilities ₹50,000.
Sales ₹18,000 − cost of goods sold ₹10,000 − rent ₹5,000 = net profit ₹3,000.
Contribution ₹1,00,000 + profit ₹3,000 − drawings ₹3,000 = closing equity ₹1,00,000.
₹1,50,000 = ₹50,000 + ₹1,00,000
Independent practice examples
1. Assets are ₹80,000 and liabilities are ₹25,000. Owner’s equity = ₹80,000 − ₹25,000 = ₹55,000.
2. That business buys ₹5,000 of inventory on credit. Assets become ₹85,000, liabilities become ₹30,000 and equity remains ₹55,000.
₹85,000 = ₹30,000 + ₹55,000
Borrowing is not revenue. Drawings and supplier repayments are not expenses. A cash movement alone does not determine profit.
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