I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

65 

The withdrawals of profit are taken in cash, and so the business loses $180 of its cash assets. After the 

withdrawals have been made, the accounting equation would be restated. 

(a) 

Assets 

 = 

Capital 

 + 

Liabilities 

 

 

 

$    

 

 

  $        

 

 

 Stall 

1,800 

 Original 

investment 

2,500 

 

 

 

 

Flowers and plants 

0   

Retained profit  

   

 

 

Cash (950 – 180) 

    770   

  (250 – 180) 

   

  

  70   

 

 

 

 2,570   

 

 

 2,570 

 

+ $0 

(b) Alternatively  Net 

assets    Capital 

 

 

 

 

 

 

$(2,570 – 0) =  $2,570 

   

 

The increase in net assets since trading operations began is now only $(2,570 – 2,500) = $70, which 

is the amount of the retained profits. 

QUESTION 

Capital

 

Which of the following is correct? 

A 

Capital = assets + liabilities 

B 

Capital = liabilities – assets 

C 

Capital = assets – liabilities 

D 

Capital + assets = liabilities 

ANSWER 

The correct answer is C. Since assets = liabilities + capital, then capital = assets – liabilities.  

 

3.5 Example continued 

When business transactions are accounted for, it should be possible to restate the assets and liabilities 

of the business after the transactions have taken place.  

The next market day is on 10 July and Liza purchases more flowers and plants for cash, at a cost of 

$740. She is not feeling well because of a heavy cold, and so she decides to accept help for the day 

from her cousin Ethel. Ethel is to be paid a wage of $40 at the end of the day. 

Trading on 10 July was again very brisk, and Liza and Ethel sold all their goods for $1,100 cash. Liza 

paid Ethel her wage of $40 and drew out $200 for herself. 

Required 

(a) 

State the accounting equation before trading began on 10 July. 

(b) 

State the accounting equation at the end of 10 July, after paying Ethel: 

(i) 

But before drawings are made 

(ii) 

After drawings have been made 

Solution 

(a) 

After the purchase of the goods for $740: 

 

Assets 

 

 

= 

 

Capital 

+ 

 

Liabilities 

 

 

$     

 

 

 

 

 

Stall 

 

1,800

 

 

 

 

 

Flowers and plants 

 

740

 

 

 

 

 

Cash (770 – 740) 

 

     30

 

 

 

 

 

 

2,570

 

= 

 

$2,570 

+ 

 

$0 

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