T.S. Grewal Class 11 Chapter 5 Q.7 - Accounting Equation (Outstanding and Prepaid Expenses)

Question 7

Show the effect of the following transactions on the Accounting Equation:

1. Started business with cash ₹50,000.
2. Salaries paid ₹2,000.
3. Wages Outstanding ₹200.
4. Interest due but not paid ₹100.
5. Rent paid in advance ₹150.

Solution

Notes:

• Outstanding expenses (wages, interest) are liabilities ??? they increase Outstanding Expenses and reduce Capital (expense recognised).
• Prepaid/advance rent is an asset ??? cash decreases and a new asset (Advance Expenses) is created; Capital is unchanged.

Accounting Equation: Assets = Liabilities + Capital

S. No.	Transactions	Assets (₹)		Liabilities (₹)	Capital (₹)
		Cash	Advance Expenses (Prepaid)	Outstanding Expenses	Capital
(i)	Started business with cash ₹50,000	+50,000	–	–	+50,000
	Balance	50,000	–	–	50,000
(ii)	Salaries paid ₹2,000 (Expense)	−2,000	–	–	−2,000
	Balance	48,000	–	–	48,000
(iii)	Wages Outstanding ₹200 (Expense accrued)	–	–	+200	−200
	Balance	48,000	–	200	47,800
(iv)	Interest due but not paid ₹100 (Expense accrued)	–	–	+100	−100
	Balance	48,000	–	300	47,700
(v)	Rent paid in advance ₹150 (Prepaid expense ??? Asset)	−150	+150	–	–
	Balance	47,850	150	300	47,700
Total Assets = ₹47,850 + ₹150 = ₹48,000			Outstanding Liabilities = ₹300	Capital = ₹47,700

Assets (₹48,000) = Liabilities (₹300) + Capital (₹47,700) ✓