True Resource Limited commenced business on 2 October 2017. As at 30 September, the total assets of the Company are ₦450,000. The total liabilities are ₦120,000. The equity is made up of ordinary shares of 200,000 at ₦1 each. The profit for the year was not shared as a dividend. The Company’s Directors decided to retain the profit for the year of ₦130,000.
Required: Prove the accounting equation.
A suggested solution to practice activity 4.1
The accounting equation is Assets = Liabilities plus Equity.
That is, amounts on the Left-hand side = amounts on the Right-hand side
The addition of ordinary share capital and retained earnings for the year is equal to Total equity.
Therefore, total equity is: ₦200,000 + ₦130,000 = ₦330,000
450,000 = 120,000 + 330,000
450,000 = 450,000
Proof of the accounting equation: The amounts on the Left and Right Hand sides are equal. Therefore, assets are equal to the liabilities.
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