*Analysis of Transactions* Rohit has the following transactions: | | Transaction | ₹ | |---|---|---| | (a) | Commenced business with cash | 1,50,000 | | (b) | Purchased machinery on credit | 40,000 | | (c) | Purchased goods for cash | 20,000 | | (d) | Purchased car for personal use | 80,000 | | (e) | Paid to creditors in full settlement | 38,000 | | (f) | Sold goods for cash costing ₹5,000 | 4,500 | | (g) | Paid rent | 1,000 | | (h) | Commission received in advance | 2,000 | Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital.

> [!TLDR] > Rohit's transactions leave **Assets ₹72,500 = Liabilities ₹2,000 (commission received in advance) + Capital ₹70,500**. **Treatment.** (b) machinery on credit raises Machine and Creditors. (d) a car for **personal** use is drawings — Cash ↓ and Capital ↓, not a business asset. (e) paying ₹38,000 against ₹40,000 owed gives **discount received ₹2,000** (gain → Capital ↑). (f) cash sale below cost gives a **loss ₹500** (Capital ↓). (h) commission received in advance is a **liability** (not yet earned), so Cash ↑ and a liability ↑. **Accounting Equation** | # | Transaction | Cash (₹) | Machine (₹) | Goods (₹) | Total Assets (₹) | = | Creditors (₹) | + | Comm. Adv. (₹) | + | Capital (₹) | |---|---|---|---|---|---|---|---|---|---|---|---| | (a) | Commenced with cash | 1,50,000 | — | — | 1,50,000 | = | — | + | — | + | 1,50,000 | | (b) | Machinery on credit | 1,50,000 | 40,000 | — | 1,90,000 | = | 40,000 | + | — | + | 1,50,000 | | (c) | Goods for cash ₹20,000 | 1,30,000 | 40,000 | 20,000 | 1,90,000 | = | 40,000 | + | — | + | 1,50,000 | | (d) | Car for personal use ₹80,000 | 50,000 | 40,000 | 20,000 | 1,10,000 | = | 40,000 | + | — | + | 70,000 | | (e) | Paid creditors in full ₹38,000 | 12,000 | 40,000 | 20,000 | 72,000 | = | — | + | — | + | 72,000 | | (f) | Sold goods (cost 5,000) ₹4,500 | 16,500 | 40,000 | 15,000 | 71,500 | = | — | + | — | + | 71,500 | | (g) | Rent paid ₹1,000 | 15,500 | 40,000 | 15,000 | 70,500 | = | — | + | — | + | 70,500 | | (h) | Commission recd in advance ₹2,000 | 17,500 | 40,000 | 15,000 | 72,500 | = | — | + | 2,000 | + | 70,500 | …

*Analysis of Transactions* Rohit has the following – Class 11 Accountancy

Numerical Questions · Q4

Analysis of Transactions

Rohit has the following transactions:

	Transaction	₹
(a)	Commenced business with cash	1,50,000
(b)	Purchased machinery on credit	40,000
(c)	Purchased goods for cash	20,000
(d)	Purchased car for personal use	80,000
(e)	Paid to creditors in full settlement	38,000
(f)	Sold goods for cash costing ₹5,000	4,500
(g)	Paid rent	1,000
(h)	Commission received in advance	2,000

Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital.

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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 …

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Transaction	Cash	+ Machine	+ Goods	= Creditors	+ Comm. adv.	+ Capital
(a) Cash 1,50,000	1,50,000	—	—	—	—	1,50,000
(b) Machinery on credit 40,000	1,50,000	40,000	—	40,000	—	1,50,000
(c) Goods for cash 20,000	1,30,000	40,000	20,000	40,000	—	1,50,000
(d) Car for personal use 80,000	50,000	40,000	20,000	40,000	—	70,000
(e) Paid creditors in full 38,000	12,000	40,000	20,000	0	—	72,000
(f) Sold goods (cost 5,000) for 4,500	16,500	40,000	15,000	0	—	71,500
(g) Rent paid 1,000	15,500	40,000	15,000	0	—	70,500
(h) Commission recd in advance 2,000	17,500	40,000	15,000	0	2,000	70,500

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Rohit's transactions leave Assets ₹72,500 = Liabilities ₹2,000 (commission received in advance) + Capital ₹70,500.

Treatment. (b) machinery on credit raises Machine and Creditors. (d) a car for personal use is drawings — Cash ↓ and Capital ↓, not a business asset. (e) paying ₹38,000 against ₹40,000 owed gives discount received ₹2,000 (gain → Capital ↑). (f) cash sale below cost gives a loss ₹500 (Capital ↓). (h) commission received in advance is a liability (not yet earned), so Cash ↑ and a liability ↑.

Accounting Equation

#	Transaction	Cash (₹)	Machine (₹)	Goods (₹)	Total Assets (₹)	=	Creditors (₹)	+	Comm. Adv. (₹)	+	Capital (₹)
(a)	Commenced with cash	1,50,000	—	—	1,50,000	=	—	+	—	+	1,50,000
(b)	Machinery on credit	1,50,000	40,000	—	1,90,000	=	40,000	+	—	+	1,50,000
(c)	Goods for cash ₹20,000	1,30,000	40,000	20,000	1,90,000	=	40,000	+	—	+	1,50,000
(d)	Car for personal use ₹80,000	50,000	40,000	20,000	1,10,000	=	40,000	+	—	+	70,000
(e)	Paid creditors in full ₹38,000	12,000	40,000	20,000	72,000	=	—	+	—	+	72,000
(f)	Sold goods (cost 5,000) ₹4,500	16,500	40,000	15,000	71,500	=	—	+	—	+	71,500
(g)	Rent paid ₹1,000	15,500	40,000	15,000	70,500	=	—	+	—	+	70,500
(h)	Commission recd in advance ₹2,000	17,500	40,000	15,000	72,500	=	—	+	2,000	+	70,500

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