Question No 4 Chapter No 5
4. What will be the effect of the following on the Accounting Equation?
(i) Harish Started Business with cash Rs 18,000
(ii) Purchased goods for cash Rs 5,000 and Credit 2,000
(iii) Sold goods for cash Rs 4,000(costing Rs 2,400)
(iv) Rent paid Rs 1,000 and rent outstanding Rs 200.
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| S. No. | Particulars | Assets | Liabilities |
Capital | ||
|---|---|---|---|---|---|---|
| Cash | +Stock | +Creditors | +O/S Wages | |||
| (i) | Harish Started Business with cash Rs 18,000 | +18,000 | - | - | +18,000 | |
| 18,000 | - | - | +18,000 | |||
| (ii) | Purchased goods for cash Rs 5,000 and Credit 2,000 | -5,000 | +7,000 | +2,000 | - | |
| 13,000 | +7,000 | +2,000 | +18,000 | |||
| (iii) | Sold goods for cash Rs 4,000(costing Rs 2,400). | +4,000 | -2,400 | - | +1,600 | |
| 17,000 | +4,600 | 2,000 | +19,600 | |||
| (iv) | Rent paid Rs 1,000 and rent outstanding Rs 200. | -1,000 | - | - | +200 | -1200 |
| Total | 16,000 | +4,600 | 2,000 | +200 | +18,400 | |
Answer: -
Assets: Cash 16,000 + Stock 4,600 = 20,600/-
Liabilities : Creditors 2,000 + Wages Outstanding 200 = 2,200/-
Capital 18,400.
Liabilities +Capital
2,200 + 18,400 = 20,600/-
This is not a part of the solution, So you don't have to write it in the exam. So why we explained if it is not needed. Because This explanation will help you to understand all transactions with logic so don't need to remember all the transactions but just understand and remember the logic use behind it.
As we discuss in the previous topic, A owner and a business both have a separate identity in the eye of law. So, the business will be treated as an Artificial Person and anything invested by the owner into the business will be treated as capital.
So, In this transaction, as shown in the above image owner investing her cash into the business, this will be treated as capital of the business. The business receiving an asset i.e. cash.
In this transaction, as shown in the above image, three accounts are involved Stock(Purchase), Cash, and Creditors.
Stock a/c (Purchase):- Because business receiving goods.
Cash a/c: - Because business paying some part of the due amount in cash.
Creditor: - Because the Business did not pay some part of the due amount yet, But it has to pay in the future, so that’s why the account of creditors is created.
In this transaction, as shown in the above image three accounts are affected i.e. Stock(Sale), Cash, and Capital(Profit):
Stock a/c (Sale):- Because business giving(selling) its goods.
Cash: - Because Business received cash from the customer.
Capital(Profit): Because the owner has the right to all profit of the business so the amount of the profit will be added in the capital a/c. (Profit = sale price – cost price) 4000-2400 = 1600(Profit)
In this transaction, as shown in the above image two accounts affected i.e. O/S wages and capital
Cash a/s: - Part of the payment is made in cash.
O/s Rent A/c: - The business did not pay any cash yet but has to pay in, that’s why it becomes a liability for the business.
Capital a/c:- Business get services from its worker. So these are expenses for the business. “ All expenses and losses are deducted from the amount of capital"
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Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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