FA – L1 – Q8 – The Accounting Equation

Record transactions for Kweku's business, prepare accounting equation, and financial statements for August.

Question

Kweku inherited GH¢10,000,000 and decided to set himself up as a merchant. The following transactions took place in July:

He introduced GH¢10,000,000 capital into the business.
He purchased Machine 1 for GH¢1,000,000.
He purchased Machine 2 for GH¢2,500,000.
He sold Machine 1 for GH¢1,500,000.
He paid rent of GH¢300,000.

Required:
(a) Show how each of the above transactions would be recorded using the accounting equation.
(b) Show the accounting equation at 31 August, including additional transactions provided in the answer document.
(c) Prepare a statement of profit or loss for the month ended 31 August and a statement of financial position at 31 August.

Answer

(a) July transactions

(1) Introduction of capital

Assets	GH¢’000	Equity	GH¢’000
Cash	10,000	Capital	10,000
	10,000		10,000

(2) Purchase of Machine 1

Assets	GH¢’000	Equity	GH¢’000
Cash	9,000	Capital	10,000
Inventory	1,000
	10,000		10,000

(3) Purchase of Machine 2

Assets	GH¢’000	Equity	GH¢’000
Cash	6,500	Capital	10,000
Inventory	3,500
	10,000		10,000

(4) Sale of Machine 1

Assets	GH¢’000	Equity	GH¢’000
Cash	8,000	Capital:
Inventory	2,500	Original	10,000
		Profit	500
	10,500		10,500

(5) Rent payment

Assets	GH¢’000	Equity	GH¢’000
Cash	7,700	Capital:
Inventory	2,500	Original	10,000
		Profit	200
	10,200		10,200

(b) Accounting equation at 31 August
There are no liabilities, so the accounting equation becomes assets = equity.

Assets	GH¢’000	Equity	GH¢’000
Non-current assets	200	Capital	Not specified
Inventory	4,000	Profit (July)	Not specified
(1)	5,500
(2)	(3,000)
(4)	(2,500)	Less Drawings (July)	Not specified
(6)	5,600
	9,600	Capital (end of July)	Not specified
Cash	6,350	Profit (August)	Not specified
(1)	(5,500)	(3)	Not specified
(2)	4,500	(2)	Not specified
(3)	(100)
(4)	1,800
(5)	(600)	Drawings:	Not specified
(6)	(5,600)
	850
	10,650		Not specified

	GH¢’000	GH¢’000
Revenue (4,500 + 1,800)		6,300
Opening inventory	0
Purchases (5,500 + 5,600)	11,100
Less Closing inventory	(4,000)
		7,100
Gross profit		(800)
Less Telephone expense		100
Net profit		(900)

Statement of financial position at 31 August

	GH¢’000	GH¢’000
Tangible non-current assets		200
Current assets
Inventory	4,000
Cash	850
		4,850
Total assets		5,050
Capital account
Capital at 1 May	10,550
Add Profit for the period	700
Less Drawings	11,250 (600)
Total capital		10,650

Level: Level 1

Topic: The Accounting Equation

Uploader: Samuel Duah