T.S. Grewal Class 11 Chapter 5 Q.6 - Accounting Equation (Machinery and Depreciation)

Question 6

Prepare an Accounting Equation on the basis of the following transactions:

1. Started business with cash ₹70,000.
2. Credit purchase of goods ₹18,000.
3. Payment made to creditors in full settlement ₹17,500.
4. Purchase of machinery for cash ₹20,000.
5. Depreciation on machinery ₹2,000.

Solution

Note: In (iii), the creditor was owed ₹18,000 but accepted ₹17,500 ??? the ₹500 saving is Discount Received (income), which increases Capital.

Accounting Equation: Assets = Liabilities + Capital

S. No.	Transaction	Assets (₹)			Liabilities (₹)	Capital (₹)
		Cash	Stock	Machinery	Creditors	Capital
(i)	Started business with cash ₹70,000	+70,000	–	–	–	+70,000
	Balance	70,000	–	–	–	70,000
(ii)	Credit purchase of goods ₹18,000	–	+18,000	–	+18,000	–
	Balance	70,000	18,000	–	18,000	70,000
(iii)	Paid creditor ₹17,500 in full settlement (Discount Received ₹500)	−17,500	–	–	−18,000	+500
	Balance	52,500	18,000	–	–	70,500
(iv)	Purchase of machinery for cash ₹20,000	−20,000	–	+20,000	–	–
	Balance	32,500	18,000	20,000	–	70,500
(v)	Depreciation on machinery ₹2,000	–	–	−2,000	–	−2,000
	Balance	32,500	18,000	18,000	–	68,500
Total Assets = ₹32,500 + ₹18,000 + ₹18,000 = ₹68,500					Liabilities + Capital = NIL + ₹68,500 = ₹68,500

Assets (₹68,500) = Liabilities (NIL) + Capital (₹68,500) ✓