Suppose Gopal starts a new business and the following successive transactions take palce :-

Explanation

Transaction 1 : - Gopal started business with Rs. 75,000 as captial.
The effect of the transaction will be that the firm has received assets totalling Rs. 75,000 in the form of cach and the claims against the firm are also Rs. 75,000 in the form of capital. The transaction can be expressed in the form of an accounting equation as follows:-
`{:("Assets",=,"Liabilities",+,"Capital"),("Cash",=,"Liabilities",+,"Capital"),("75,000",=," "0,+,"75,000"):}`
Transaction 2 :- Gopal purchased furniture for Cash Rs.5,000.
The effect of this transaction is that the cash is reduced by Rs.5,000, but a new asset of the same amount has been acquired.The transaction decreases one asset and at the same time increases the other asset with the same amount, leaving the total of the assets unchanged. The equation now will appear as follows : -

Transaction 3 : - Gopal purchased goods for Cash Rs. 20,000.
As come into existence, leaving the total of the assets unchanged. The equation will appear as follows:-

Transaction 4 : - Gopal purchased goods on credit for Rs. 16,000.
This transaction will increase goods on the assets side and will create a liability in the form of creditors. (The persons from on the assets side and will create a liability in the form of creditors. (The persons from whom goods have been purchased on credit are called creditors.) The equation will be as follows:-

Transaction 5 :- Goods costing Rs. 12,000 sold on credit for Rs.15,000.
This transaction will give rise to a new asset in the form of Debtors to the extent of Rs. 15,000. (Debtors are those persons to whom goods have been sold on credit ). But the goods will be reduced only by Rs. 12,000, the cost of goods sold. The net increase in assets Rs.3,000 is the amount of profit which will be added to the capital. The effect of the transaction has been explained in the following equation : -

Transaction 6 : - Paid Rs. 1,000 for rent.
The effect of the transaction is that firstly, it reduces cash and secondly, as the rent is an expense, it results in a loss which decreases the capital. The revised equation will appear as follows :-

From the study of the above transactions it may be concluded that every transaction has a double effect and in each case Assets = Liabilites + Capital. In other words, it can be said that Accounting Equation is true in all cases. The last equation appearing in the books of Gopal may also be presented in the form of a statement named as Balance Sheet. It will appear as shown below : -
BALANCE SHEET OF GOPAL
as at .............................................