1. Double entry accounting requires that:
(i) All transactions that create debits to asset accounts must create credits to liability or capital accounts;
(ii) A transaction that requires a debit to a liability account require a credit to an asset account;
(iii) Every transaction

Question

1. Double entry accounting requires that:
(i) All transactions that create debits to asset accounts must create credits to liability or capital accounts;
(ii) A transaction that requires a debit to a liability account require a credit to an asset account;
(iii) Every transaction must be recorded with equal debits equal total credits.

2. State different kinds of transactions that increase and decrease capital.

3. Does debit always mean increase and credit always mean decrease?

4. Which of the following answers properly classifies these commonly used accounts: (1) Building (2) Wages (3) Credit sales (4) Credit purchases (5) Electricity charges due but not yet paid (outstanding electricity bills) (6) Godown rent paid in advance (prepaid godown rent) (7) Sales (8) Fresh capital introduced (9) Drawings (10) Discount paid

| | Assets | Liabilities | Capital | Revenue | Expense |
|---|---|---|---|---|---|
| (i) | 5,4 | 3 | 9,6 | 2,10 | 8,7 |
| (ii) | 1,6 | 4,5 | 8 | 7,3 | 2,9,10 |
| (iii) | 2,10,4 | 4,6 | 8 | 7,5 | 1,3,9 |

Accepted Answer

> [!TLDR]
> 1 → (iii); 2 → capital rises with profit and fresh capital, falls with drawings and loss; 3 → No; 4 → option (ii).

### Reasoning

**1.** Double entry accounting requires that every transaction be recorded with equal total debits and equal total credits — statement **(iii)**. Statements (i) and (ii) describe only special cases and are not always true.

**2.** Capital **increases** when the owner introduces fresh capital and when the business earns a net profit (revenues exceed expenses). Capital **decreases** when the owner makes drawings and when the business suffers a net loss or an expense.

**3. No.** Debit means *increase* only for assets and expenses/losses; for liabilities, capital and revenues/gains a debit means *decrease*. Likewise credit means increase for liabilities, capital and revenues, but decrease for assets and expenses. …

Type of Account	Debit means	Credit means
Asset (cash, building, debtors)	Increase	Decrease
Liability (loan, creditors)	Decrease	Increase
Capital (owner's equity)	Decrease	Increase
Expense (rent, salary)	Increase	Decrease
Income (sales, interest earned)	Decrease	Increase

Particulars	Debit (₹)	Credit (₹)
Cash A/c Dr.	5,00,000
To Capital A/c		5,00,000
(Capital introduced)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance c/d	5,00,000	By Balance b/d	5,00,000
Total	5,00,000	Total	5,00,000

Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings	20,000	By Balance b/d	—
To Balance c/d	30,000	By Interest on Capital	30,000
		By Salary	10,000
		By Share of Profit	10,000
Total	50,000	Total	50,000

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Net Profit (transferred from P&L)	1,00,000
Partner A	30,000
Partner B	20,000
To Partner's Salary (A)	10,000
To Partner's Commission (B)	5,000

Concept understanding — Debit Credit Order

Debit Credit Order – A First Look

Everyday Intuition

The Golden Rule

Why It Matters

Accounting Treatment – A Worked Example

Format of a Capital Account (Fixed Capital Method)

Format of a Profit & Loss Appropriation Account

Reasoning

	Assets	Liabilities	Capital	Revenue	Expense
(i)	5,4	3	9,6	2,10	8,7
(ii)	1,6	4,5	8	7,3	2,9,10
(iii)	2,10,4	4,6	8	7,5	1,3,9

Reasoning

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