Illustrations · Illustration 1
Q.Analyse the effect of each transaction on assets and liabilities and show that the both sides of Accounting Equation (A = L + C) remains equal:
(i) Introduced ₹8,00,000 as cash and ₹50,000 by stock.
(ii) Purchased plant for ₹3,00,000 by paying ₹15,000 in cash and balance at a later date.
(iii) Deposited ₹6,00,000 into the bank.
(iv) Purchased office furniture for ₹1,00,000 and made payment by cheque.
(v) Purchased goods worth ₹80,000 for cash and for ₹35,000 in credit.
(vi) Goods amounting to ₹45,000 was sold for ₹60,000 on cash basis.
(vii) Goods costing to ₹80,000 was sold for ₹1,25,000 on credit.
(viii) Cheque issued to the supplier of goods worth ₹35,000.
(ix) Cheque received from customer amounting to ₹75,000.
(x) Withdrawn by owner for personal use ₹25,000.
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Start your 14-day free trial to unlock the full solution →Every transaction changes at least two items but keeps A = L + C balanced. After all ten transactions the firm holds ₹11,70,000 of assets, financed by ₹2,85,000 of liabilities (creditors) and ₹8,85,000 of capital.
Concept
The accounting equation states that a firm's assets always equal the claims against them — outsiders' claims (liabilities) plus the owner's claim (capital). A profit on sale increases capital; a loss or the owner's drawings decreases it. Because each transaction has a give-and-take (dual) effect, the two sides move together and the equation never goes out of balance.
Working — effect of each transaction
- (i) Cash +₹8,00,000 and Stock +₹50,000 on the asset side; Capital +₹8,50,000.
- (ii) Plant & Machinery +₹3,00,000, Cash −₹15,000; a liability (creditor) of ₹2,85,000 arises.
- (iii) Cash −₹6,00,000, Bank +₹6,00,000 — one asset replaces another.
- (iv) Furniture +₹1,00,000, Bank −₹1,00,000.
- (v) Cash −₹80,000, Stock +₹1,15,000; liabilities +₹35,000 (the credit portion).
- (vi) Cash +₹60,000, Stock −₹45,000; Capital +₹15,000 (profit on sale).
- (vii) Debtors +₹1,25,000, Stock −₹80,000; Capital +₹45,000 (profit on sale).
- (viii) Bank −₹35,000, liabilities −₹35,000 (creditor paid by cheque).
- (ix) Bank +₹75,000, Debtors −₹75,000.
- (x) Cash −₹25,000, Capital −₹25,000 (owner's drawings).
Statement showing the effect on the accounting equation
| After | Cash | Stock | Plant & Machinery | Bank | Furniture | Debtors | Total | Liabilities | Capital |
|---|---|---|---|---|---|---|---|---|---|
| (i) | 8,00,000 | 50,000 | — | — | — | — | 8,50,000 | — | 8,50,000 |
| (ii) | 7,85,000 | 50,000 | 3,00,000 | — | — | — | 11,35,000 | 2,85,000 | 8,50,000 |
| (iii) | 1,85,000 | 50,000 | 3,00,000 | 6,00,000 | — | — | 11,35,000 | 2,85,000 | 8,50,000 |
| (iv) | 1,85,000 | 50,000 | 3,00,000 | 5,00,000 | 1,00,000 | — | 11,35,000 | 2,85,000 | 8,50,000 |
| (v) | 1,05,000 | 1,65,000 | 3,00,000 | 5,00,000 | 1,00,000 | — | 11,70,000 | 3,20,000 | 8,50,000 |
| (vi) | 1,65,000 | 1,20,000 | 3,00,000 | 5,00,000 | 1,00,000 | — | 11,85,000 | 3,20,000 | 8,65,000 |
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