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Question
Accounting equation remains intact under all circumstances. Justify the statement with the help of an example
Solution
The double entry accounting system states that or every debit there is an equal amount of credit.
Hence there is unlikely to be the equality of the total assets with the total claims of the business and the accounting equation will persist to be Assets = Liabilities + Capital,
Hence this equation will remain intact under all the circumstances.
The example for the same are as follows:
a. Mr. A started a business with cash Rs. 100000
Assets = Liabilities + Capital
Cash increases by 100000
100000 = 0 + 100000
b. Purchasdgoods on credit for Rs. 30000
Assets (Inventory) = 30000
Creditors = 30000
Assets = Liabilities + Capital
30000 = 30000 + 0
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RELATED QUESTIONS
Prepare accounting equation on the basis of the following:
(a) Harsha started business with cash ₹ 2,00,000
(b) Purchased goods from Naman for cash ₹ 40,000
(c) Sold goods to Bhanu costing ₹ 10,000/- ₹ 12,000
(d) Bought furniture on credit ₹ 7,000
Prepare accounting equation from the following:
(a) Kunal started business with cash ₹ 2,50000
(b) He purchased furniture for cash ₹ 35,000
(c) He paid commission ₹ 2,000
(d) He purchases goods on credit ₹ 40,000
(e) He sold goods (Costing ₹ 20,000) for each ₹ 26,000
Mohit has the following transactions, prepare accounting equation:
| (a) | Business started with cash | ₹ 1,75,000 |
| (b) | Purchased goods from Rohit | ₹ 50,000 |
| (c) | Sales goods on credit to Manish (Costing ₹ 17,500) | ₹ 20,000 |
| (d) | Purchased furniture for office use | ₹ 10,000 |
| (e) | Cash paid to Rohit in full settlement | ₹ 48,500 |
| (f) | Cash received from Manish | ₹ 20,000 |
| (g) | Rent paid | ₹ 1,000 |
| (h) | Cash withdrew for personal use | ₹ 3,000 |
Rohit has the following transactions:
| (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.
Use accounting equation to show the effect of the following transactions of M/s Royal Traders:
| (a) | Started business with cash | ₹ 1,20,000 |
| (b) | Purchased goods for cash | ₹ 10,000 |
| (c) | Rent received | ₹ 5,000 |
| (d) | Salary outstanding | ₹ 2,000 |
| (e) | Prepaid Insurance | ₹ 1,000 |
| (f) | Received interest | ₹ 700 |
| (g) | Sold goods for cash (Costing ₹ 5,000) | ₹ 7,000 |
| (h) | Goods destroyed by fire | ₹ 500 |
Show the accounting equation on the basis of the following transaction:
| (a) | Udit started business with: | |
| (i) Cash | ₹ 5,00,000 | |
| (ii) Goods | ₹ 1,00,000 | |
| (b) | Purchased building for cash | ₹ 2,00,000 |
| (c) | Purchased goods from Himani | ₹ 50,000 |
| (d) | Sold goods to Ashu (Cost ₹ 25,000) | ₹ 36,000 |
| (e) | Paid insurance premium | ₹ 3,000 |
| (f) | Rent outstanding | ₹ 5,000 |
| (g) | Depreciation on building | ₹ 8,000 |
| (h) | Cash withdrawn for personal use | ₹ 20,000 |
| (i) | Rent received in advance | ₹ 5,000 |
| (j) | Cash paid to himani on account | ₹ 20,000 |
| (k) | Cash received from Ashu | ₹ 30,000 |
Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation:
| (a) | Started business with cash | ₹ 1,20,000 |
| (b) | Rent received | ₹ 10,000 |
| (c) | Invested in shares | ₹ 50,000 |
| (d) | Received dividend | ₹ 5,000 |
| (e) | Purchase goods on credit from Ragani | ₹ 35,000 |
| (f) | Paid cash for household Expenses | ₹ 7,000 |
| (g) | Sold goods for cash (costing ₹ 10,000) | ₹ 14,000 |
| (h) | Cash paid to Ragani | ₹ 35,000 |
| (i) | Deposited into bank | ₹ 20,000 |
Show the effect of following transaction on the accounting equation:
| (a) | Manoj started business with | |
| (i) Cash | ₹ 2,30,000 | |
| (ii) Goods | ₹ 1,00,000 | |
| (iii) Building | ₹ 2,00,000 | |
| (b) | He purchased goods for cash | ₹ 50,000 |
| (c) | He sold goods (costing ₹ 20,000) | ₹ 35,000 |
| (d) | He purchased goods from Rahul | ₹ 55,000 |
| (e) | He sold goods to Varun (Costing ₹ 52,000) | ₹ 60,000 |
| (f) | He paid cash to Rahul in full settlement | ₹ 53,000 |
| (g) | Salary paid by him | ₹ 20,000 |
| (h) | Received cash from Varun in full settlement | ₹ 59,000 |
| (i) | Rent outstanding | ₹ 3,000 |
| (j) | Prepaid Insurance | ₹ 2,000 |
| (k) | Commission received by him | ₹ 13,000 |
| (l) | Amount withdrawn by him for personal use | ₹ 20,000 |
| (m) | Depreciation charge on building | ₹ 10,000 |
| (n) | Fresh capital invested | ₹ 50,000 |
| (o) | Purchased goods from Rakhi | ₹ 6,000 |
Transactions of M/s Vipin Traders are given below.
Show the effects on Assets, Liabilities and Capital with the help of accounting Equation:
| (a) | Business started with cash | ₹ 1,25,000 |
| (b) | Purchased goods for cash | ₹ 50,000 |
| (c) | Purchase furniture from R.K. Furniture | ₹ 10,000 |
| (d) | Sold goods to Parul Traders (Costing ₹ 7,000 vide bill no. 567) | ₹ 9,000 |
| (e) | Paid cartage | ₹ 100 |
| (f) | Cash Paid to R.K. furniture in full settlement | ₹ 9,700 |
| (g) | Cash sales (costing ₹ 10,000) | ₹ 12,000 |
| (h) | Rent received | ₹ 4,000 |
| (i) | Cash withdrew for personal use | ₹ 3,000 |
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.
(c) Purchased office supplies on credit for ₹ 12,000
(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.
