*Analysis of Transactions* Bobby opened a consulting firm and completed these transactions during November, 20

Numerical Questions · Q10

Q. Analysis of Transactions Bobby opened a consulting firm and completed these transactions during November, 2017:

(a) Invested ₹4,00,000 cash and office equipment with ₹1,50,000 in a business called Bobbie Consulting.

(b) Purchased land and a small office building. The land was worth ₹1,50,000 and the building worth ₹3,50,000. The purchase price was paid with ₹2,00,000 cash and a long term note payable for ₹3,00,000.

(d) Bobbie transferred title of motor car to the business. The motor car was worth ₹90,000.

(e) Purchased for ₹30,000 additional office equipment on credit.

(f) Paid ₹75,00 salary to the office manager.

(g) Provided services to a client and collected ₹30,000

(h) Paid ₹4,000 for the month's utilities.

(i) Paid supplier created in transaction c.

(j) Purchase new office equipment by paying ₹93,000 cash and trading in old equipment with a recorded cost of ₹7,000.
(k) Completed services of a client for ₹26,000. This amount is to be paid within 30 days.
(l) Received ₹19,000 payment from the client created in transaction k.
(m) Bobby withdrew ₹20,000 from the business. Analyse the above stated transactions and open the following T-accounts: Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense.

Puducherry CbseNCERTSubjective· 5mImportance★★★★★est

76% · 38/50 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

Concept understanding — Accounting Equation

The Accounting Equation: The Foundation of Double-Entry Bookkeeping

Imagine you start a small business. You put in ₹1,00,000 of your own money. The business now has ₹1,00,000 in cash. But where did that cash come from? It came from you, the owner. So the business owes you ₹1,00,000. That's the core idea: everything the business owns (assets) is matched by a claim against it (liabilities or owner's equity).

The Precise Meaning

The accounting equation states:

Assets = Liabilities + Owner's Equity

This is not a suggestion — it is an identity. It must always hold true, after every single transaction, without exception. Let's break it down:

Assets are resources the business controls (cash, inventory, machinery, buildings, debtors).
Liabilities are claims of outsiders (creditors, bank loans, outstanding expenses).
Owner's Equity (also called Capital) is the owner's claim on the business. It equals the amount the owner originally invested plus any profits retained, minus any withdrawals.

Important

The equation is always in balance. Every transaction affects at least two accounts, and the equation remains true. This is the entire point of double-entry bookkeeping.

Why It Matters

The accounting equation is not just a theory — it is the practical tool that tells you whether a transaction has been recorded correctly. If you ever prepare a trial balance and it doesn't tally, the equation is the first place you look. It also helps you understand the financial position of a business at a glance.

For example, if a business has total assets of ₹5,00,000 and liabilities of ₹2,00,000, then the owner's equity must be ₹3,00,000. That tells you the net worth of the business from the owner's perspective.

Accounting Treatment: Debit and Credit

Every transaction affects the equation. The rules are simple:

Increase in an asset → Debit that asset account
Decrease in an asset → Credit that asset account
Increase in a liability → Credit that liability account
Decrease in a liability → Debit that liability account
Increase in owner's equity → Credit the capital account
Decrease in owner's equity → Debit the capital account

Let's see this with a few common transactions.

Transaction 1: Owner invests cash into the business

The business receives cash (asset increases) and owes the owner more (capital increases).

Account	Debit (₹)	Credit (₹)
Cash A/c	1,00,000
To Capital A/c		1,00,000

Effect on equation: Assets (+₹1,00,000) = Liabilities (no change) + Owner's Equity (+₹1,00,000). Balanced.

Transaction 2: Purchase machinery on credit

The business gets machinery (asset increases) and creates a liability to the supplier.

Account	Debit (₹)	Credit (₹)
Machinery A/c	50,000
To Creditors A/c		50,000

Effect on equation: Assets (+₹50,000) = Liabilities (+₹50,000) + Owner's Equity (no change). Balanced.

Transaction 3: Pay rent in cash

The business pays rent (expense), which reduces owner's equity (profit decreases). Cash also decreases.

Account	Debit (₹)	Credit (₹)
Rent A/c	10,000
To Cash A/c		10,000

Effect on equation: Assets (-₹10,000) = Liabilities (no change) + Owner's Equity (-₹10,000). Balanced.

Note

Expenses and drawings reduce owner's equity. Revenues and gains increase owner's equity. That is why expenses are debited (they reduce equity, which is normally credited) and revenues are credited.

The Expanded Accounting Equation

For a more complete picture, especially when dealing with revenues, expenses, and drawings, the equation expands to:

Assets = Liabilities + (Owner's Capital – Drawings + Revenues – Expenses)

This is the same equation, just unpacked. It shows that profit (Revenue – Expense) increases owner's equity, and drawings decrease it.

A Practical Example: The Full Cycle …

Start your 14-day free trial to unlock the full solution →

Each transaction is posted to the two accounts it affects. Balances of the T-accounts:

Account	Balance (₹)	Side
Cash	1,12,500	Dr
Client (Accounts receivable)	7,000	Dr
Office supplies	12,000	Dr
Motor car	90,000	Dr
Building	3,50,000	Dr
Land	1,50,000	Dr
Office equipment	2,73,000	Dr
Withdrawals	20,000	Dr
Salary expense	7,500	Dr
Utilities expense	4,000	Dr
Long term payables (note)	3,00,000	Cr
Accounts payable	30,000	Cr
Capital	6,40,000	Cr
Consulting revenue	56,000	Cr

Start your 14-day free trial to unlock the full solution →

Bobbie Consulting's transactions are posted to T-accounts. Key balances: Cash ₹1,12,500 (Dr), Capital ₹6,40,000 (Cr), Long-term note payable ₹3,00,000 (Cr), Consulting revenue ₹56,000 (Cr); total debits = total credits = ₹10,26,000. Three accounts required by the transactions (Office equipment, Accounts payable, Consulting revenue) are added, as the given list omits them.

Treatment. Owner's cash + equipment + motor car brought in increase Capital. Land and building are assets bought part-cash, part note payable (a long-term liability). Office supplies and extra equipment bought on credit create Accounts payable. Services rendered are revenue (credited); expenses (salary, utilities) and withdrawals are debited. The trade-in in (j) removes the old equipment's recorded cost ₹7,000 and records new equipment at ₹1,00,000.

Ledger (T-accounts)

Cash Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Capital (a)	4,00,000	By Building/Land (b)	2,00,000
To Consulting revenue (g)	30,000	By Salary expense (f)	7,500
To Client (l)	19,000	By Utilities expense (h)	4,000
		By Accounts payable (i)	12,000
		By Office equipment (j)	93,000
		By Withdrawals (m)	20,000
		By Balance c/d	1,12,500
Total	4,49,000	Total	4,49,000

Client Account (Accounts receivable)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Consulting revenue (k)	26,000	By Cash (l)	19,000
		By Balance c/d	7,000
Total	26,000	Total	26,000

Office Supplies Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Accounts payable (c)	12,000	By Balance c/d	12,000
Total	12,000	Total	12,000

Motor Car Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Capital (d)	90,000	By Balance c/d	90,000
Total	90,000	Total	90,000

Building Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash/Note payable (b)	3,50,000	By Balance c/d	3,50,000
Total	3,50,000	Total	3,50,000

Land Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash/Note payable (b)	1,50,000	By Balance c/d	1,50,000
Total	1,50,000	Total	1,50,000

Office Equipment Account (added — required by (a),(e),(j))

Particulars	Amount (₹)	Particulars	Amount (₹)
To Capital (a)	1,50,000	By Office equipment/Cash (j) trade-in	7,000
To Accounts payable (e)	30,000	By Balance c/d	2,73,000
To Cash + trade-in (j)	1,00,000
Total	2,80,000	Total	2,80,000

Long Term Payables (Note Payable) Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance c/d	3,00,000	By Building/Land (b)	3,00,000
Total	3,00,000	Total	3,00,000

Accounts Payable Account (added — required by (c),(e),(i))

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash (i)	12,000	By Office supplies (c)	12,000
To Balance c/d	30,000	By Office equipment (e)	30,000
Total	42,000	Total	42,000

Capital Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance c/d	6,40,000	By Cash + Equipment (a)	5,50,000
		By Motor car (d)	90,000
Total	6,40,000	Total	6,40,000

Withdrawals Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash (m)	20,000	By Balance c/d	20,000
Total	20,000	Total	20,000

Salary Expense Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Cash (f)	7,500	By Balance c/d	7,500
Total	7,500	Total	7,500

Utilities Expense Account

|---|---|---|---| …

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ9 — *Analysis of Transactions* Transactions of M/s Vipin Traders are given…→Next question · questions-for-practiceQ11 — *Journalising* Journalise the following transactions in the books of H…

Q.Analysis of Transactions Bobby opened a consulting firm and completed these transactions during November, 2017:

🎓Unlock everything free for 14 days

Unlock everything free for 14 days