Assume that Mr. Naveed decided to start a "shoes business" of his own, to belcnown as Naveed Company." The new business was started on 1st January, 2005, when Mr. Naveed invested Rs. in his business. Recall that the business entity is kept .separate from its owner.
The business unit has borrowed Rs. 5,00,000 from its owner. This is a first transaction of the It brought a double change in the financial position of the business-- an asset (cash) increased by ),OOG and a liability (owner's equity or capital) increased also by Rs. 5,00,000. In omer words, this is consisting of two elements;
The receipt of Rs. 500,000 cash
Supplied by the owner of the business.
ACTION NO. f
The initial accounting equation of the new business men appeared as follows;
Assets = iabjlil a + Owner's equity
Cash
Rs. 500.000
Nil
Capital Rt. 500.000
Equation.2
Mr. Naveed purchased a building for Rs. 2,00,000. This transaction brought two changes- cash decreased by Rs. 2,00,000 and Building (a new asset) increased by Rs.' 2,00,000. Now the equation
Assets
Cash -i- Building Ba. 300.000+ 200.000
Liabilities + Owner's equity
: Capital
Nil + Rs. 500.000
It may be noted that there is no change on the right side of the equation. Simply one asset (cash) converted into another asset (Building). The two sides of the equation remains equal.
COUMTDM EQUATION
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