6 Rennais Accounting Equations LEARNING OBJECTIVES After studying this Chapter, you should be able to understand : ‘© Meaning of Accounting Equation ¢ Effect of Transactions on Accounting Equation ¢ Meaning of Debit and Credit ‘© Rules of Debit and Credit Accounting Equations Prior to understanding an accounting equation, it is essential to know about a ance Sheet. An example of a simple Balance Sheet in T form is given below :— BALANCE SHEET 0 | Cash & Bank Debtors ilities -— ; | Stock in Trade 1,00,000 creditors ] 40,000 | Furniture jank Overdraft | Machinery | Building I. 1,00,000| 1,00, n the above Balance Sheet assets are recorded on the right hand side and capital abilities are recorded on the left hand side. At any point of time, the total of the sides of the Balance Sheet is always equal because the assets of a business are ased either from the funds (capital) supplied by the proprietor or from the funds fed by external parties. The above balance sheet discloses that there are total worth &1,00,000, out of which assets worth £60,000 have been purchased from vital provided by the proprietor and the remaining %40,000 worth of assets have urchased by the funds provided by external parties. e above position can be expressed in the form of an accounting equation :— Liabilities + Capital 40,000 + 60,000OR. Assets 100,000. OR - Le ities | Capitat Assets - | e6n.000 21,00,000. £40,000 Accounting equation fies that the assets of a business are always equal 1, fotal of capital and liabilities. A business transaction will result in the change jn r i of the assets, liabilities or capital of the firm and even after the change the assets be again equal to the total of capital and liabilities. If'a business transaction Fesults the increase of assets, there will also be a corresponding increase in the amour.” cither capital or liabilities by the same amount, a Effect of Transe ILLUSTRATION T. Suppose Gopal starts a new business and the following successive t take place . mS ‘Transaction 1 :— Gopal started business with &75,000 as capital The effect of the transaction will be that the firm has received assets totaj 75,000 in the form of cash and the claims against the firm are also 75,000 in form of capital. The transaction can be expressed inthe form of an accounting ears as follows : ions on Accounting Equations ling Assets = Liabilities + Capital Cash = Liabilities + Capital 75,000 = 0 + 75,000 Transaction 2 :— Gopal purchased furniture for Cash %5,000. The effect ofthis transaction is that the cash is reduced by €5,000, but a new aset of the same amount has been acquired. The transaction decreases one asset and atthe ‘same time increases the other asset with the same amount, leaving the total of the assets unchanged. The equation now will appear as follows :— Assets. Liabilities + Capital Cash + Furiture Liabil + Capital Old Equation 75,000 + 0 = 0 + 75,000 Transaction _(-)5,000__ + 5,000 0 +0 New Equation 70,000 + 5,000 = 0 + 75,000 Transaction 3 :— Gopal purchased goods for Cash €20,000, As a result of this transaction, cash balance is reduced and another asset (goods) has come into existence, leaving the total of the assets unchanged. The equation will appear as follows :— Assets = Liabilities + Capital Cash + Fumiture + Goods = Liabilities + Capital Old Equation 70,000 + 5,000 + 0 = 0 + 75,000 Transaction (-)20,000 + 0 + 20,000 = 0 +0 New Equation 50,000 + 5,000 + 20,000 = 9 + 75,000ccOUNTING EQUATIONS 83 Transaction 4: — Gopal purchased goods on credit for €16,000. This transaction will increase goods on the assets aide and will create a liability in the form of creditors. (The persons from whom goods have been purchased on credit led creditors.) The equation will he as follows ares Assets ~ Liabilities » Capital Cosh 4 Furniture + Goals Creditors + Capital (1d Equation $0,000 $,000— 20,000 -o + 75,000 Transaction 0 soo © t6.000 16.000 0 New Pguation $0,000 1 §,000 + 44,0000 16,000» 75,000 Transaction §: Goods costing €12,000 sold on eredit for £15,000, This transaction will give rise to a new asset in the form of Debtors to the extent ‘of £15,000, (Debtors are those persons to whom goods have been sold on credit). But the goods will be reduced only by &12,000, the cost of goods sold. ‘The net increase in assets €3,000 is the amount of profit which will be added to the capital. The effect of the transaction has been explained in the following equation :— Assets ilities + Capital Cash + Fumiture+ Goods + Debtors Creditors + Capital (Old Equation $0,000 + 5,000 + 36,000 + 0 = 16,000 + 75,000 Transaction 0 + 0 = 12,000 + 15,000 0 + 3,000 16,000 + 78,000 Equation $0,000 + 5,000 + 24,000 + 15,000 Transaction 6 :— Paid %1,000 for rent. The effect of the transaction is that firstly, it reduces cash and secondly, as the rent is an expense, it results in a loss which decreases the capital. The revised equation will appear as follows :— Assets Cash + Fumiture+ Goods + Debtors Old Equation 50,000 + 5,000 + 24,000 + 15,000 16,000 + 78,000 Transaction (-) 1,000 + 0 +0 +0 0 © 1,000 New Equation 49,000 + 5,000 + 24,000 + 15,000 = 16,000 + 77,000 From the study of the above transactions it may be concluded that every transaction has a double effect and in each case Assets = Liabilities + Capital. In other words, it can be said that ‘Accounting Equation is true in all cases’. The last equation appearing in the books of Gopal may also be presented in the form of a statement named as Balance Sheet. It will appear as shown below :— BALANCE SHEET OF GOPAL 8 ssn Liabilities + Capital Creditors + Capital ditors Gopal’s Capital 45,000 Goods 24,000 Debtors 93,000 L ==SS WLLUSTRATION 2. Show the Accounting Equation on the basis of the following transactions prepare a Balance Sheet on the basis of the last new equation :-— aad . Mukesh started business with cash Purchased goods for cash . Purchased goods on credit . Purchased furniture for cash . Paid rent . Received Commission Withdrew cash for private use . Sold goods on credit (cost price %30,000) _ Paid to creditors ICAI NEWSrs em emmOUs) 00'S 12 SIONPAID OF PFEd | ACCOUNTING EQUATIONS: ee ooast wONeMPa MEN —— (ooo 8°) | o 00'0#2 10} Ups9 Uo Spoo8 PIOS | Roni uonenbg MN, | ol o00'€2 gen areatad 30} YSED MOPUEM, Meee vuonenbg MON, | = 005 = ‘0052 WOISSIUNOD P2AT2OPY : 00'rr uonenby MON L = oz (00°22 WOU Pea - 0009 uonenby MeN ¢ ~ x — 00°92 +0 =0 + 0009 + 0 + 009 = sep 20 aumnumy paseyaing go's + =n = 0 +0 + 00's + 00% ‘uonenbg Man, o00'0z2 + o'r = 0 +0 + 002 + 0 pao uo spoo8 pase ‘ i spood paseyaing go's + 0 =o +0 + 000% + on0'zs uonenby Mon nan = 0 +0 + 000% + 000% ©) | o00'Rz2 Yseo 3 go's + 0 = 0 + 0 + 0 + 00°08 ooo'ea “cena ows +0 =0 +0 = : ° + 0 + 000'08 000‘082 rie) + sioupayy = siomaq + ammums + yoog + yseg, HIM ssoutsng pours ysoynyy, ae : NOLLVNOd ONILNNODDV (2 =NOIT RINGBALANCE SHEET OF MUKESH as at (LLUSTRATION 3. Prepare ‘Accounting Equation’ from the following : Cor AL (a) Started business with cash %1,00,000. (®) Purchased goods for cash 20,000 and on credit €30,000. oO Sold goods for ences 210,000 and on credit costing 715,000 bothat a profit of 20%, ag (Chandigarh, 2018)me 5 . . 10 1oHd : sade 01 poppe s 00'S = 000'E2 + 000°22 2TH 01H - oor ‘ol = ‘00's = vet x 000'st = Wd ‘000° =z * 0 '¢1 904d aIS agoz.yo mosdv 8 pj0s 000'S12 Buns0> SPOCD (1) 00°81 = 000°E + 0 ‘090'z = 224 x ooo'or = 3yotd e407 30 1yoad b 38 PIOs QOO‘OT2 SuHso2 Spooy () 1 SION BUPLIOAA ( 105 Spoo8 PIOS @ It uonenby ON ae or. 000°L2 | sasuadxa proyssnoy 10} yseo pred) uonenby MON OO 000°SE2 | paso uo spoo8 poroyamd) (2) uonenby MON @& 000°S2 PuopiAig poaisooy (Pp) uonenby MON, fs oe 00°02 SoueYs UI porssauT = (9) uonenba MN | * 000°012 P2Aloas wu @ uonenba 000" ri yseD YM ssoutsng paumg! (0)ACCOUNTING EQUATIONS oocoe't + 0 = “000% + “oor “Foovee + Beeee vonenbg jeu E oor =) 0 = 0 + 0 +0 + oof © 000'¢2 -9en [euosiad 105 mazpypum YseD! (2) ooresl + 0 = 000% _+ Ooo'o1 + ooo'ce + o0z'is __ wonenby aN, LL o'r + 0 = 0 + 0 + 0 + 0007 (+) 000'r2 Paaiz0q sy (4) gorecl + 0 = 000% + ooo'or + ooo'ee + 00TL wonenby MN an ‘ 0 ana + 0 + 00001 ©) ooo'zt (+) 000712; 23 (000'012 SunsoD) saqws yey (8) = 000 _+ 90001 + O00’ + oor'so uortenby MON, cas = 0 + 0 + 0 + p16 © 002'62 wati9R—5 | ‘ny ut saragumng “ry 01 YseD preg!) = 0006 _+ 00001 + 000% + o06'rs uonenby Man, t = 0 + 0 + 0 + 001 oO > 0012 28eue) preg} (2) = 0006 __+ 000%01 + o00' + poo'se uonenba Mon, a = 000 + 0 + 00% Oo 00°62 493 000'L2 Sunso> 4 ‘SH9pex] ued 01 spoos pjos} (p) conan + ooo'or + uonenby Mon = 0 + 00001 + 00°02 Nps uo amumy) i WA woy sunrumy paseysmg| (2) o = 0 + 0 + onenbg mon, 000'0s2 0 = 0 + 0 + 'yse9 405 spoo8 paseyaing| (g) 0 = 0 +o + ‘uopenby, 0 = 0 + -— 000'SZT2 USED WM ssauisng pares | NOLLVNOA ONLLNNODOV‘sasuadxo Suspuersino pur swouAed agueape Jo Surucout eer oa B Dot Fone + WOT Tuontenba eu 0 +0 + 00008 = | o0'0E2 asn jeuosied | 30} 21949 Jor0ur wn} 4) | uwonenba MON + o00't + 00°07 oe = 0 +0 ooo's + 0000 + 005°Z2'1 + 00000 = +0 = 0 +0 + 00S'r (00°12 #Burpueisino reyes: pue gos‘pa yseo ut Arepes pred) (+) if o00'or = ooo'e + Ooo'e + OOO uonenba MON, + 0 = 0 + 0000 + ~ 00008 + o00'or2 Bunsoo| 000'082 4S" 105 sPoo8 Plos} (1) | + ooo = ooo's + 000.0 + O00LY uonenby M9N, ooo'oz = 0 + 000'0L — + 000'0S ~— —} -—-000'0Z2 PAID PuE DOO'OS2 | ' 'ysv9 103 spoo8 paseysing | (11!) : ea 0 = goo'e + 00046 I uonenbg Man. * Coo'e 429UEApe UT N94 pred vuonenby ‘yseD tpIM ssausng paras “dx predaig + yp01g NOLLVNOA ONLLNNODOV ACCOUNTING EQUATIONS 'on . ACCOUNTING EQUAT) ILLUSTRATION 7. | ; ‘Show the effect of following transactions on the accounting equation : 1). Manoj started business with z ‘ () Cash 2,30,000 Gi) Goods 1,00,000 Git) Building 2,00,000 (2) He puirchased goods for cash 50,000 (3) He sold goods for cash (costing %20,000) 35,000 (4) He purchased goods from Rahul 55,000 (5) He sold goods to Varun (Costing 752,000) 60,000 (© He paid cash to Rahul in full settlement 53,000 (7) Salary paid by him 20,000 Received cash from Varun in full settlement 59,000 Rent outstanding 3,000 (10) Commission received by him 13,000 ‘Amount withdrawn by him for personal use 20,000 Depreciation charged on building 10,000 (Solution on Next Page) ILLUSTRATION 8. Prepare accounting equation from the following : (@ Started business with cash %1,00,000 and goods worth €20,000. (6) Sold 50% of the above goods at a profit of €2,000 on credit to Ram. (c) Ram paid 90% of his amount in full settlement. (KYS 2019) SOLUTION: ACCOUNTING EQUATION Ba As Gah Started business 1,00,000 + 20,000 Sold 50% of above goods at a profit of | %2,000 on credit ease at 10,000 + 12, 00 + 2,000 1,00,000 + 10,000. + 12,000) oe 000) 1,22,000 amount in full | settlement + 10,800 = 12,000) = (> 1,200 Final Equation | 1,10,809_ + 10,000, —_|_=_ 120,800 ~oACCOUNTING EQUATIONS. “+ bo0'o0'z + ooo'est + Goot10% | -0 +0 +0005 + 09 + 000'00'z _+ OOo'EE'T + 000'CH'T #0 +0 + 0000 + 000°00'% FS omeet + 000'29'r | +0 +0 + 000° — + 000°00'% + ooo'ee'l + 000'SI'Z _ +0 + 000°7S -0 o00'00'Z + 000's8'I_ + 000'SI°7 _| 0 + 000°SS +0 00°00 + O0o‘0e' + O0O'SI'Z | ‘uonenbg MAN 0 + 000%0z - O0o'sE + 000°S€2 395) 00°00 _+ O00'os'T + 000°08"T 0 + 0000S + 000° = — 000'00'% + 000'00'1__+ 000‘0E'2 000'00'% + 000°00'1 ++ 000°0E'Z + SupInd + Y01S + UE NOLLVNOA ONLLNNODOV 000°0Z2 Bunsoo spoo8 pjos (£) uonenby MN. _ a 'yseD 103 spoo8 paseyaind, (7) onenby Surpling pue spoos ‘ysep pum ssouisng pas (1) (2: NOLLNTOS__. -ABCOUNTING EOUATIOgs | B14 -uoneroasdop pue sasuodxe Suypunisino Jo Sunseous ‘aun Stpueysiopun 103 6 Jardeu{3 01 J2521 Ob PASTAPE O7e SIUAPMSs : 210N =0 J Woo0eT F 00v%eT + OOOPET — | vwonenbg [eutg 7 =0 + 00001 — 0 +O “Burpjing wo wonersaxdoq) (Zi) =0 + ,000'00' + 00'EeI + 000'r6'I uonenbg oN, =o +0 +0 = 00002 | es feuosied soy ameapepim| (11) =0 + 000'00'% + OOO'EET + 000RI'T uonenby aN j =0 +0, +0 + 00! +} pearooas woissrummio| (01) =0 + 000007 + O00'EET + 000107 ‘uonenby MaN[ACCOUNTING EQUATIONS . . eee - Sb ILLUSTRA Prove that the accounting equation is satisfied in all the following transactions of Sudhir :— 1. Started business with Cash €50,000 and goods £20,000. 2, Bought goods for Cash €15,000 and on eretil for €10,000, 3. Goods Costing €24,000 sold at a profit of 33 4%. Half the payment received in cash, 4. Purchased furniture for office use €6,000 and for household use of Sudhir 4,000, > (Delhi 2015) (Solution on Next Page) LLUSTRATION 10. If the Capital of a business is %1,00,000 and outside liabilities are %60,000, Calculate total assets of the business. SOLUTION. Assets: Liabilities + Capital = 60,000 + €1,00,000 = €1,60,000 ILLUSTRATION 11. If total assets of a business are €2,00,000 and net worth (Capital) is €1,50,000, Calculate Creditors. Creditors (Liabilities) = Assets - Capital = €2,00,000 — €1,50,000 = %50,000 ILLUSTRATION 12. ‘A commenced business on Ist April, 2017 with a Capital of %5,00,000, On 31st March, 2018, his assets were worth %7,80,000 and liabilities £70,000. Find out his closing capital and profits earned during the year. (Chandigarh 2019) r Closing Capital = Closing Assets ~ Closing Liabilities 27,80,000 — €70,000 = %7,10,000 Closing Capital — Opening Capital %7,10,000 — %5,00,000 = %2,10,000 Profit uo5 octz + B00‘ ojo ug + 0 + 00°01 00'ra 2t4PNS J9.asn pjoyasnoy 40} pur 000'9a sn aayyo 49) aumuuuny paseysing| —“y + 0001 + 0001S wwononbsy MON aa + 000% - 0001 + ysv ut poatooau! quowed 94) J1BH. “vette awyoud| 819 plos ooo'pz2 Sunso9 spoon] | + o00'sr + 000s __wononby mon | + 000° + 00'S 000'012 40) 1paio uo pure 00'S 1.2 Ys®2 40} spoo8 1yfMog) = 7 + 00°02 + _000'0s ceo ERTS] + o0'0c + d00'0 (000°0za S008 pue Qoo'osa se yun ssouysng pays NOLLVNO3 ONLLNNODOV ():NOILATOS[ACCOUNTING EQUATIONS. LUSTRATION 13. (a) Surender Mohan started business on Ist April, 2019 with Capital of 27,50,000 and a loan of €2,00,000 taken from Punjab National Bank. On 31st March, 2020 @ his assets were €15,00,000. Find out his Capital on 31st March, 2020 and "/ profits made or losses incurred during the year 2019-20. (jp If in the above illustration, the proprietor had introduced additional capital of %1,25,000 and had withdrawn %40,000 for personal purposes, find out the profit. SOLUTION: (@) Closing Capital Closing Assets — Closing Liabilities %15,00,000 — %2,00,000 13,00,000 Profit Closing Capital - Opening Capital %13,00,000 ~ %7,50,000 = 35,50,000 () Profit = Closing Capital + Drawing — Additional Capital ~ Opening Capital = 813,00,000 + %40,000 — 1,25,000 - %7,50,000 4,65,000 USTRATION 14. Give an example for each of the following type of transactions : (@ Increase in one asset, decrease in another asset. (ii) Increase in asset, increase in liability iii) Increase in asset, increase in owner's capital. (i) Decrease in asset, decrease in liability. (v) Decrease in asset, decrease in owner's capital. (i) Purchase of Machinery for Cash : Increase in Machinery and decrease in Cash (i) Purchase of Machinery on Credit: Increase in Machinery and increase in liability (iif) Capital introduced by proprietor: Increase in Cash and increase in Capital (iv) Payment to Creditors : Decrease in Cash and decrease in Creditors (») Cash withdrawn by proprietor from: Decrease in Cash the business for personal use and decrease in Capital Meaning o1 All accounts are divided into two sides. The left side of an account is arbitrarily or traditionally called Debit side and the right side of an account is called Credit side. In the abbreviated form, Debit is written as Dr. and Credit is written as Cr. For example,4 EQUATIONS the transactions relating to cash are recorded in an account, entitled ‘Cash Account: and its format will be as given below :— Debit (Dr) CASH ACCOUNT Credit (Cr is often called The above account resembles English capital letter shape account. An Account is abbreviated as A/c. Rules of Debit and Credit In order to decide when to write on the debit side of an account and when to write on the credit side of an account. There are two approaches :— (1) American approach or Modern approach, and (11) English approach or Traditional approach. (English approach is also called ‘Double Entry System’ which has been discussed in the next chapter) American Approach :—The rules of debit and credit depend on the nature of an account. For this purpose, all the accounts are classified into the following five categories in the American approach :-— 1. Assets Accounts Il. Liabilities Accounts TI. Capital Account or Owner’s Equity Account IV. Revenue or Income Accounts V. Losses or Expenses Accounts While discussing an accounting equation, we have studied that if there is an increase or decrease in one account, there will be equal decrease or increase in another account. Accordingly, following rules of debit or credit in respect of the various categories of accounts can be obtained :— Assets Accounts :— When there is an increase in the amount of an asset, such an increase is recorded on the debit side of the asset account and if there is a reduction in the amount of an asset, such reduction is recorded on the credit side of the asset account. For example, if a firm purchases furniture of 5,000, it will be recorded on the debit side of the furniture account, since the furniture has increased by this amount. Again, if the firm sells furniture of %2,000, the reduction will be recorded on the credit side of the furniture account, Dr. ASSET ACCOUNT -— When there is an increase in the amount of a liability, such an increase will be recorded on the credit side of the liability account, On the contrary, if there is a reduction in the amount of a liability, it will be recorded on the debit side of the liability account. For example, if a firm borrows %10,000 from Govind, the account of Govind will be credited since 10,000 is now owing to him.ace When the loan is repaid, the account of Govind will be debited since the liability no longer exists. LIABILITY ACCOUNT cr IIL. Capital Account :— An increase in the capital is recorded on the credit side and the decrease in the capital is recorded on the debit side. Suppose, the proprietor introduces the additional capital in the business, the capital account will be credited, Similarly, if the proprietor withdraws some money for his personal use, /.e., makes drawings, the capital account will be debited. Dr. CAPITAL ACCOUNT Cr. IV. Revenue or Income Accounts :— All increases in the gains and incomes are recorded on the credit side of the concerned income account as it leads to increase in the capital. On the contrary, if there is a reduction in any gain or income, the account concerned will be debited, as it leads to decrease in the capital. Dr. REVENUE OR INCOME ACCOUNT Cr. V. Losses or Expenses Accounts :— All increases in the losses and expenses are recorded on the debit side of the concerned expenses account as it leads to decrease in the capital. On the contrary, the reduction in expenses is recorded on the credit side. Dr. LOSSES OR EXPENSES ACCOUNT Cr. The rules given above may be summarised as below — Debit the increase in assets and Credit the decrease in assets. Credit the increase in liabilities and Debit the decrease in liabilities. Credit the increase in Capital and Debit the decrease in Capital. Credit the increase in Incomes and Debit the decrease in Incomes. 5. Debit the increase in Expenses and Credit the decrease in Expenses. On the basis of the above discussion it can be concluded that — The term debit should not be taken to mean favourable things. It may represent favourable or unfavourable,-increase or decrease depending on the nature of an account. Similarly, the term credit may represent favourable or unfavourable, increase or decrease depending on the nature of the concerned account. In the case of assets and expenses, debit means increase and credit means decrease. In the case of liabilities, capital and incomes, debit represents decrease and credit represents increase, Dr. ASSETS OR EXPENSES ACCOUNT eReACCOUNTING Eau, Dr. LIABILITY, CAPITAL OR INCOME ACCOUNT Gr these accounts Record increase in these accounts on thi ILLUSTRATION 15. On which side will the increase in the following accounts be recorded? Also mention the nature of Account — 1. Cash 5, Proprietor's Account wy 2. Machinery 6, Rent Received 3. Debtor 7, Salary Paid 4, Creditor 8, Interest Received SOLUTION: (Nature of Account) (Nature of Account) 1, Debit — Asset 5. Credit — Capital 2, Debit — Asset 6. Credit — Income 3. Debit — Asset 7. Debit — Expenses 4, Credit — Liability 8, Credit — Income ILLUSTRATION 16. ‘On which side the decrease in the following accounts be recorded? Also mention the nature of Account :— 1. Fumiture 4, Salary Paid 2. Bank 5. Salary Outstanding 3. Proprietor’s Account _ 6. Subhash — a Customer SOLUTION: (Nature of Account) (Nature of Account) 1. Credit — Asset 4, Credit — Expenses 2. Credit — Asset 5. Debit — Liability 3. Debit — Capital A/c 6. Credit — Asset WLEOSTRATION 17. From the following transactions, state the nature of accounts and state which account will be debited and which account will be credited : Sahdev started business with cash %5,00,000. Purchased goods for cash %20,000. Purchased goods from Raghubir on credit for €25,000. Purchased furniture from Fancy Furniture House for ®1,50,000 on credit. Sold goods for cash %30,000. Sold goods to Yuvraj on credit for €50,000. Cash paid to Raghubir £20,000. Cash received from Yuvraj 15,000. Paid rent €10,000. eeI aw aeee Account unt }. Sahdev started business with Cash Asset [Increase 5,00,000 Cash %5,00,000 Capital | Capital Increase | 5,00,000 2. Purchased goods for Cash Purchases |Expense increase | 20,000) ®20,000 ‘Cash | Asset Decrease | 20,000 3. Purchased goods from Purchases |Expense Increase | 25,000 - Raghubir on credit for Raghubir Liability [Increase | 25,000) 25,000 | { ‘4. Purchased furniture from |Furniture | Asset Increase | 1,50,000 ~t Fancy Fumiture House for | Fancy Liability [Increase | 1,50,000) €1,50,000 on credit Furniture House “5, Sold goods for cash €30,000 [Cash [Asset [Increase | 30,000] Sales Revenue | Increase 30,000) 6 Sold goods to Yuvraj on|Yuvraj Asset [Increase | 50,000 credit 50,000 Sales [Revenue | Increase 50,000 7, Cash paid to Raghubir|Raghubir |Liability [Decrease | 20,000 20,000 Cash Asset ‘Decrease 20,000 %. Cash received ffom Yuvraj|Cash [Asset increase | 15,000 715,000 Yuvraj | Asset Decrease 15,000) 9. Paid rent €10,000 Rent Expense | Increase 10,000 | coe Asse | Deceeae ILLUSTRATION 18. Open ‘T” shape account for furniture and write the following on the proper side : 1, Furniture purchased for £20,000 2. Furniture sold costing 5,000 3, Furniture again purchased for %8,000 4, Old Furniture discarded for €2,500 5. Value of Furniture was reduced by %2,000 ‘SOLUTION Dr. FURNITURE ACCOUNT cr. ‘Record decrease in furniture on this side — 20,000 2. By Cash)— Furniture Sold 8,000 4, By Furgiture Discarded 5. By Depreciation Total Balance Increase in furniture on this side — 1, To Cash—Fuiture Purchased 3. To Cash — Furniture Purchased Totaltransactions on SANJAY (Creditor’s A/c) ~] Record increase on this side 25,000/ |. By Purchases 2,000) 3. By Purchases ord decrease on this side To Cash To Goods Retumed To Cash Total Balance ILLUSTRATION 20. Put the following on the proper side of Debtor's A/c, Creditor’s A/c and Cash Ale — Sold goods for Cash shape account of our creditor ‘Sanjay’ and write the following the proper side : 1. Purchased goods from Sanjay on Credit for 40,000. 2, Paid to Sanjay €25,000. 3. Again purchased goods from Sanjay on Credit for £16,000. 4. Goods retuned to Sanjay for €2,000. 5. Paid to Sanjay £20,000, Cr, Jb) Sold goods to X on Credit 40,000 fc). | Received cash from X , 28,000 fd) | Purchased goods from ¥ on Credit 22,000 fe) | Purchased goods from ¥ for cash _ 8,000 Paid to Y -euf5,000 SOLUTION: Dr. ‘CASH ACCOUNT Cr. ~ 25,000’ (e) By Purchases 28,000 | (f) By ¥Balance 12,000 he - _ Poe Dr. Y (Creditor’s Account) cr. SS e's, i (f) To Cash 15,000 |(d) By Purchases 22,000 Balance 7,000 = 22,000 22,000 TLLOSTRATION 21. From the following particulars prepare the Proprietor's Capital Account : ‘Started business with cash %75,000 ‘Withdrew from business for personal use €10,000 | Life insurance premium paid 713,000 Sold personal investments worth 15,000 at 5% profit and brought into | business on the same date, Loss for the year %5,000 _# (Chandigarh, 2017) CAPITAL ACCOUNT Cr. be Decrease will Increase willbe | recorded on this side recorded on this side : 2015 2015 June 17 |To Cash (Drawings) | 10,000| April 1 |By Cash 75,000 July 31 |To Cash (Drawings) | 13,000 Sept. 25 |By Cash Dec. 31 |To Profit & Loss A/c | (15,000 x 105/100) | 15,750 (Loss) Dec. 31 |To Balance o/d ‘SHORT ANSWER QUESTION: 1. Prove that, “Accounting Equation holds good under all circumstances.”” Give atleast two illustrations. 2. Give two basic purposes of accounting equation. [Ans. (j) Since accounting equation is always equal it ensures the accuracy in recording of business transaction. (ii) Ithelps in preparation of Balance Sheet.)