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Page No 87:

Question 1:

State the three fundamental steps in the accounting process.

Answer:

The fundamental steps in the accounting process are diagrammatically presented below.

Page No 87:

Question 2:

Why is the evidence provided by source documents important to accounting?

Answer:

The evidence provided by the source document is important in the following manners:

  1. It provides evidence that a transaction has actually occurred.

  2. It provides important and relevant information about date, amount, parties involved and other details of a particular transaction.

  3. It acts as a proof in the court of law.

  4. It helps in verifying transactions during the auditing process.

Page No 87:

Question 3:

Should a transaction be first recorded in a journal or ledger? Why?

Answer:

A transaction should be recorded first in a journal because journal provides complete details of a transaction in one entry. Further, a journal forms the basis for posting the transactions into their respective accounts into ledger. Transactions are recorded in journal in chronological order, i.e. in the order of occurrence with the help of source documents. Journal is also known as ‘book of original entry’, because with the help of source document, transactions are originally recorded in books. The process of recording the transactions in journal and then in ledger is presented in the below-given flow chart.

Page No 87:

Question 4:

Are debits or credits listed first in journal entries? Are debits or credits indented?

Answer:

As per the rule of double entry system, there are two columns of ‘Amount’ in the journal format namely ‘Debit Amount’ and ‘Credit Amount’. The way of recording in a journal is quite different from normal recording. Journal entry is recorded in journal format in which the ‘Debit Amount’ column is listed before the ‘Credit Amount’ column.

Credits are indented. Indentation is leaving a space before writing any word. Journal entry has its own jargon. While journalising, in the ‘Particulars’ column of journal format, debited account is written first and credited account is in the next line leaving some space, which is indentation.

Page No 87:

Question 5:

Why are some accounting systems called double accounting systems?

Answer:

Some accounting systems are called double accounting systems because under this system there are two aspects of every transaction, i.e., every transaction has dual effect. Every transaction affects two accounts simultaneously, that is represented by debiting one account and crediting the other account. It is based on the fact that if there is receiver, there should be a giver.

Page No 87:

Question 6:

Give a specimen of an account.

Answer:

_________Account

Dr.

Cr.

Date

Particulars

J.F.

Amount Rs

Date

Particulars

 J.F.

Amount Rs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Page No 88:

Question 7:

Why are the rules of debit and credit same for both liability and capital?

Answer:

Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like, capital invested by the proprietor, is termed as liability to the business. Business entity concept treats business and business owner separately. Capital of the owner is treated as liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from capital and net loss reduce the capital, and so, capital is debited. Thus the rules of debit and credit are same for both liability and capital.

Page No 88:

Question 8:

What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?

Answer:

J.F. number is the number that is entered in the ledger at the time of posting entries into their respective accounts. It helps in determining whether all transactions are properly posted in their accounts. It is recorded at the time of posting and not at the time of recording the transactions.

The purpose of entering J.F. number in the ledger is because of the below given benefits.

  1. J.F. number helps in locating the entries of accounts in the journal book. In other words, J.F number helps to locate the position of the related journal entry and subsidiary book in the journal book.

  2. J.F. number in accounts ensures that recording in the books of original entry has been posted or not.

Page No 88:

Question 9:

What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawings (d) record the fresh capital introduced by the owner.

Answer:

  1. Increase in revenue

Increase in revenue is credited as it increases the capital. Capital has credit balance and if capital increases, then it is credited.

  1. Decrease in expense

Decrease in expense is credited as all expenses have debit balance. If expense decreases, then it is credited.

  1. Record drawings

Capital has credit balance; if the capital increases, then it is credited. If capital decreases, then it is debited. Drawings are debited as they decrease the capital.

  1. Record of fresh capital introduced by the owner− credit

Capital has credit balance, if capital increases, then it is credited. The introduction of fresh capital increases the balance of capital, and so, it is credited.

Page No 88:

Question 10:

If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?

Answer:

If a transaction has a decreasing effect on an asset, then this decrease is recorded as credit. This is because, as all assets have debit balance and if assets decrease, then it is credited. For example, sale of furniture results in decrease in furniture (asset); so, the sale of furniture will be credited.

If a transaction has a decreasing effect on a liability, then this decrease is recorded as debit. This is because all liabilities have credit balance. If the liability increases, then it is credited and if the liability decreases, then it is debited. For example, payment to the creditors results in a decrease in the creditors (liability); so, the creditors account will be debited.

Page No 88:

Question 1:

Describe the events recorded in accounting systems and the importance of source documents in those systems?

Answer:

It is beyond human capabilities to memorise each financial transaction and that is why, source documents have their own importance in accounting system. They are considered as an evidence of transactions and can be presented in the court of law. Transactions supported by evidence can be verified. Source documents also ensure that transactions recorded in the books are free from personal biases.

A few events that are supported by source document are given below.

  1. Sale of goods worth Rs 200 on credit, supported by sales invoice/bill

  2. Purchase of goods worth Rs 500 on credit, supported by purchase invoice/bill

  3. Cash sales worth Rs 1,000, supported by cash memo

  4. Cash purchase of goods worth Rs 400, supported by cash memo

  5. Goods worth Rs 100 returned by customer, supported by credit note

  6. Return of goods purchased on credit worth Rs 200, supported by debit note

  7. Payment worth Rs 1,200 through bank, supported by cheques

  8. Deposits into bank worth Rs 500, supported by pay-in slips.

Out of the above events, only those events that can be expressed in monetary terms, are recorded in the books of accounts. However, the non-monetary events are not recorded in accounts; for example, promotion of manger cannot be recorded but increment in salary can be recorded at the time when salary is paid or due.

Source document in accounting is important because of the below given reasons.

  1. It provides evidence that transaction has actually occurred.

  2. It provides information about the date, amount and parties involved and other details of a particular transactions.

  3. It acts as an evidence in the count of law.

  4. It helps in verifying the transaction during the auditing process.

Page No 88:

Question 2:

Describe how debits and credits are used to analyse transactions.

Answer:

Debit originated from the Italian word debito, which in turn is derived from the Latin word debeo, which means ‘owed to proprietor’ and credit comes from the Italian word credito, which is derived from the Latin word credo, which means belief, i.e., ‘owed by proprietor’.

According to the dual aspect concept, all the business transactions that are recorded in the books of accounts, have two aspects- debit and credit. The dual aspect can be better understood by the help of an example; bought goods worth Rs 500 on cash. This transaction affects two accounts with the same amount simultaneously. As goods are brought in exchange of cash, so the cash balances in the business reduce by Rs 500, i.e. why the cash account is credited. Simultaneously, the amount of goods increases by Rs 500, so purchases account will be debited. Debit and credit depend on the nature of accounts involved; such as assets, expenses, income, liabilities and capital. There are five types of Accounts.

  1. Assets- These include all properties or legal rights owned by a firm for its operations, such as cash in hand, plant and machinery, bank, land, building, etc. All assets have debit balance. If assets increase, they are debited and if assets decrease, they are credited.

For example, furniture purchased and payment made by cheque. The journal entry is:

Furniture A/c

Dr.

To Bank A/c

 

 

Here, furniture and bank balance, both are assets to the firm. As furniture is purchased, so furniture account will increase, and will be debited. On the other hand, payment of furniture is being made by cheque that reduces the bank balance of the business, so bank account will be credited.

  1. Expense− It is made to run business smoothly and to carry day to day business activites.

All expenses have debit balance. If an expense is incurred, it must be debited.

For example, rent paid. The journal entry is:

Rent A/c

Dr.

To Cash A/c

 

 

Here, rent is an expense. All expenses have debit balance. Hence, rent is debited. On the other hand, as rent is paid in cash that reduces the cash balances, so cash account is credited.

  1. Liability− Liability is an obligation of business. Increase in liability is credited and decrease in liability is debited.

For example, loan taken from bank. The journal entry is:

Bank A/c

Dr.

To Bank Loan A/c

 

 

Here, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan from bank has been credited because it increases the liabilities.

  1. Income− Income means profit earned during an accounting period from any source. Income also means excess of revenue over its cost during an accounting period. Income has credit balance because it increases the balance of capital.

For example, rent received from tenant. The journal entry is:

Cash A/c

Dr.

To Rent A/c

 

 

Here, rent is an income; hence, rent account has been credited and cash has been debited, as rent received increases the cash balances.

  1. Capital− Capital is the amount invested by the proprietor in the business. Capital has credit balance. Increase in capital is credited and decrease in capital is debited

For example, additional capital introduced by owner. The journal entry is:

Cash A/c

Dr.

To Capital A/c

 

 

As additional capital is introduced, so the amount of capital will increase, i.e. why, capital account is credited. On the other hand, as capital is introduced in form of cash, so the cash balances decrease, i.e. why, cash account is debited.

Page No 88:

Question 3:

Describe how accounts are used to record information about the effects of transactions?

Answer:

Every transaction is recorded in the original book of entry (journal) in order of their occurrence; however, if we want to know that how much we receive from our debtors or how much to pay to the creditors, it is not possible to determine at a single movement. Hence, we prepare accounts to know the position of business activities in the meantime.

There are some steps to record transactions in accounts; it can be easily understood with the help of an example.

Sold goods to Mr A worth Rs 50,000 on 12th April and received payment Rs 40,000 on 25th April. The following journal entries will be recorded:

 

Particulars

L.F.

Debit Amount

Rs

Credit Amount

Rs

Apr.12

A's A/c

Dr.

22

50,000

 

   

To Sales

 

18

 

50,000

 

(Goods sold on credit to Mr. A)

   

 

 

 

 

 

 

 

 

 

 

Apr.25

Cash A/c

Dr.

13

40,000

 

   

To A's A/c

 

22

 

40,000

 

(Cash received from Mr. A)

 

 

 

 

           
               

Step 1− Locate the account in ledger, i.e., Mr A’s Account.

Step 2− Enter the date of transaction in the date column of the debit side of Mr A’s Account.

Step 3− In the ‘Particulars’ column of the debit side of Mr A’s Account, the name of corresponding account is to be written, i.e., ‘Sales’.

Step 4− Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr A’s Account.

Step 5− Enter the amount in the ‘Amount’ column.

Step 6− Same steps are to be followed to post entries in the credit side of Mr A’s Account.

Step 7− After entering all the transactions for a particular period, balance the account by totalling both sides and write the difference in shorter side, as ‘Balance c/d’.

Step 8− Total of account is to be written on either sides.

Page No 88:

Question 4:

What is a journal? Give a specimen of journal showing at least five entries.

Answer:

Journal is derived from the French word Jour, means daily records. In this book, transactions are recorded in order of their occurrence, i.e., in chronological order from the source document. It is also termed as the book of original entry and each transaction is termed as journal entry.

Performa of Journal

In the books of.....

Date

 

Particulars

 

L.F.

Debit Amount Rs

Credit Amount

Rs

           
           

 

 

 

 

 

 

 

Date− Date of transaction is recorded in the order of their occurrence.

Particulars− Details of business transactions like, name of the parties involved and the name of related accounts, are recorded.

L.F.− Page number of ledger account when entry is posted.

Debit Amount− Amount of debit account is written.

Credit Amount− Amount of credit account is written.

Recording of a Journal Entry

 

 

Date

1)

Started business with cash Rs 1,00,000

April 01

2)

Open a bank account Rs 20,000

April 03

3)

Purchase goods for cash Rs 25,000

April 04

4)

Goods sold for cash Rs 30,000

April 05

5)

Goods sold to Mr. X Rs 2,000

April 06

 

Books of Mr A

Journal

Date

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

April1

Cash A/c

Dr.

 

1,00,000

 

 

 

To Capital A/c

 

 

 

1,00,000

 

(Started business with cash)

   

 

 

 

 

 

 

 

 

 

 

April 3

Bank A/c

Dr.

 

20,000

 

   

To Cash A/c

 

 

 

20,000

 

(Bank account opened with cash)

 

 

 

 

     

 

 

 

 

April 4

Purchase A/c

Dr.

 

25,000

 

   

To Cash

 

 

 

25,000

 

(Goods purchased for cash)

 

 

 

 

 

 

 

 

 

 

 

April 5

Cash A/c

Dr.

 

30,000

 

 

 

To Sales A/c

 

 

 

30,000

 

(Goods sold for cash)

 

 

 

 

 

 

 

 

 

 

 

April 6

Mr. X's A/c

Dr.

 

2,000

 

 

 

To Sales

 

 

 

2,000

 

(Goods sold to Mr. X on credit)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

177,000

177,000

         
               

 

Page No 88:

Question 5:

Differentiate between source documents and vouchers.

Answer:

Basis of Difference

Source Documents

Vouchers

Meaning

It refers to the documents in writing, containing the details of events or transactions.

When source document is considered as evidence of an event or transaction, then it is called voucher.

Purpose

It is used for preparing accounting vouchers.

It is used for analysing the transactions.

Recording

It acts as a basis for preparing accounting voucher that helps in recording.

It acts as a basis for recording transactions.

Preparation

It is prepared at the time when an event or a transaction occurs.

It can be prepared either when an event or a transaction occurs, or later on.

Legality/Validity

It can be used as evidence in the court of law.

It can be used for assessing the authentication of transactions.

Prepared By

It is prepared by the persons who are directly involved in the transactions, or who are authorised to prepare or approve these documents.

It is prepared by the authorised persons or by the accountants.

Examples

Cash memo, invoice, and pay-in-slip, etc.

Cash memo, invoice, pay-in-slip (if used as evidence), debit note, credit note, cash vouchers, transfer vouchers, etc.

 

 

Page No 88:

Question 6:

Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.

Answer:

According to the dual-aspect concept, every transaction simultaneously, has two effects of equal amount, i.e. debit and credit. However, in any case, the equality of total assets with the total claims of business (sum of capital and liabilities) is not disturbed. This equality is algebraically represented as:

Or

or, Liabilities = Asset − Capital

or, Capital = Assets − Liabilities

In any circumstance the above equation cannot be changed. For example,

  1. Business started with cash Rs 1,00,000

Cash A/c

Dr.

 

To Capital A/c

 

Assets

=

Liabilities

+

Capital

Cash

 

 

 

1,00,000

(1,00,000)

 

 

 

 

  

Assets decrease, as cash is invested into the business and capital increases. Thus the equality between LHS and RHS remains intact.

  1. Goods purchased on credit Rs 20, 000

Assets

=

Liabilities

+

Capital

Cash

Stock

 

Creditors

 

 

 

 

 

 

 

 

1,00,000

20,000

=

20,000

+

100,000

  

Assets increase as well as liability increases, without disturbing the equality.

  1. Goods purchased with cash 25000

Assets

=

Liabilities

+

Capital

Cash

Stock

=

 

 

 

1,00,000

20,000

 

20,000

+

1,00,000

(25,000)

25,000

 

 

 

 

  

As goods are purchased for cash, so cash balance reduces by Rs 25,000, but on the other hand, stock balance increases by Rs 25,000. Thus the total balance of LHS remains equal to the total claims.

Page No 88:

Question 7:

Explain the double entry mechanism with an illustrative example.

Answer:

Double entry system is based on the dual aspect concept. It means every transaction has two-sided effects, i.e., every debit has its credit.

This system is explained by Luca Pacioli in his book Summade Arithmetica Geometria Proportioni et Proportionalita, 1494. He said if one is receiver, then the other should be the giver.

In double entry system, accounts are classified as shown below.

  1. Personal Accounts: It includes individual persons, firms, companies, and other institutions, such as Mr. A, M/s ABC & Co. etc.

Rule of double entry system for personal accounts:

  • Debit the receiver.

  • Credit the giver.

For example:

  1. Cash paid to Mr. A.

A’s A/c

Dr.

To Cash

  1. Cash received from Mr. X

Cash A/c

Dr.

To Mr. X

  1. Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.

  1. Real Account− It includes all types of assets.

  1. Tangible assets that can be seen and touched; for example, machinery, building, etc.

  1. Intangible assets that cannot be seen and touched; for example, goodwill, patent, etc.

Rule of double entry system for real accounts:

  • Debit what comes in.

  • Credit what goes out.

For example:

Furniture purchased for cash

Furniture A/c

Dr.

To Cash A/c

  1. Nominal Account: It includes all expenses, losses, incomes and gains.

Rule of double entry system for nominal accounts:

  • Debit all losses and expenses.

  • Credit all gains and incomes.

For example:

  1. Rent paid

Rent A/c

Dr.

To Cash A/c

  1. Commission received.

Cash A/c

Dr.

To Commission A/c

Page No 88:

Question 1:

Prepare accounting equation on the basis of the following:

(a) Harsha started business with cash Rs 2,00,000

(b) Purchased goods from Naman for cash Rs 40,000

(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000

(d) Bought furniture on credit Rs 7,000

Answer:

S.No.

Explanation

Assets

=

Liabilities

+

Capital

Cash

+

Stock

+

Debtors

+

Furniture

Creditors

   

(a)

Increase in cash

2,00,000

           

=

   

 

 

Increase in capital

 

 

 

 

 

 

 

 

 

 

2,00,000

 

 

2,00,000

           

=

NIL

+

2,00,000

(b)

Increase in stock

   

40,000

             

 

 

Decrease in cash

(40,000)

 

 

 

 

 

 

 

 

 

 

 

 

1,60,000

+

40,000

       

=

NIL

+

2,00,000

(c)

Increase in debtors

       

12,000

         

 

 

Decrease in stock

   

(10,000)

             

 

 

Profit

 

 

 

 

 

 

 

 

 

 

2,000

 

 

1,60,000

+

30,000

+

12,000

   

=

NIL

 

2,02,000

(d)

Increase in furniture

           

7,000

     

 

 

Increase in creditors

 

 

 

 

 

 

 

 

7,000

 

 

 

 

1,60,000

+

30,000

+

12,000

+

7,000

=

7,000

+

2,02,000

                         

 

 

Page No 88:

Question 2:

Prepare accounting equation from the following:

 

 

Rs

(a)

Kunal started business with cash

2,50,000

(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 Rs 20,000) for cash

26,000

 

 

Answer:

 

S.No.

Explanation

Assets

 

Liabilities

+

Capital

Cash

+

Furniture

+

Stock

 

 

=

Creditors

   

(a)

Increase in cash

2,50,000

                 

 

 

Increase in capital

 

 

 

 

 

 

 

 

 

 

2,50,000

 

 

2,50,000

           

=

NIL

+

2,50,000

(b)

Increase in furniture

   

35,000

             

 

 

Decrease in cash

(35,000)

 

 

 

 

 

 

 

 

 

 

 

 

2,15,000

+

35,000

       

=

NIL

+

2,50,000

(c)

Decrease in capital (Expense)

                   

(2,000)

 

Decrease in cash

(2,000)

 

 

 

 

 

 

 

 

 

 

 

 

2,13,000

+

35,000

       

=

NIL

+

2,48,000

(d)

Increase in stock

       

40,000

         

 

 

Increase in creditors

 

 

 

 

 

 

 

 

40,000

 

 

   

2,13,000

+

35,000

+

40,000

   

=

40,000

+

2,48,000

(e)

Increase in cash

26,000

                 

 

 

Decrease in stock

 

     

(20,000)

         

 

 

Increase in capital (Profit)

 

 

 

 

 

 

 

 

 

 

6,000

 

 

2,39,000

+

35,000

+

20,000

 

 

=

40,000

+

2,54,000

                         

 

 



Page No 89:

Question 3:

Mohit has the following transactions, prepare accounting equation:

 

 

 

Rs

(a)

Business started with cash

1,75,000

(b)

Purchased goods from Rohit

 50,000

(c)

Sales goods on credit to Manish (Costing Rs 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

 

 

Answer:

S.No.

Explanation

Assets

 

Liabilities

+

Capital

Cash

+

Stock

+

Debtors

 

Furniture

=

Creditors

   

(a)

Increase in cash

1,75,000

                 

 

 

Increase in capital

 

 

 

 

 

 

 

 

 

 

1,75,000

 

 

1,75,000

           

=

NIL

+

1,75,000

(b)

Increase in stock

   

50,000

             

 

 

Increase in creditors (Rohit)

 

 

 

 

 

 

 

=

50,000

+

1,75,000

 

 

1,75,000

+

50,000

       

=

50,000

+

1,75,000

(c)

Increase in debtors (Manish)

       

20,000

         

 

 

Decrease in stock

   

(17,500)

             

 

 

Increase in capital (Profit)

 

 

 

 

 

 

 

 

 

 

2,500

 

 

1,75,000

+

32,500

+

20,000

   

=

50,000

+

1,77,500

(d)

Increase in furniture

           

10,000

     

 

 

Decrease in cash

(10,000)

 

 

 

 

 

 

 

 

 

 

   

1,65,000

+

32,500

+

20,000

+

10,000

=

50,000

+

1,77,500

(e)

Decrease in creditors (Rohit)

 

             

(50,000)

 

 

 

Decrease in dash

(48,500)

                 

 

 

Increase in capital

 (Discount received)

 

 

 

 

 

 

 

 

 

 

1,500

   

1,16,500

+

32,500

+

20,000

+

10,000

=

NIL

+

1,79,000

(f)

Increase in cash

20,000

                 

 

 

Decrease in debtors (Manish)

       

(20,000)

       

 

 

   

1,36,500

+

32,500

+

NIL

+

10,000

=

NIL

+

1,79,000

(g)

Decrease in capital (Expense)

 

                 

(1,000)

 

Decrease in cash

1,000

 

 

 

 

 

 

 

 

 

 

   

1,35,500

+

32,500

+

NIL

+

10,000

=

NIL

+

1,78,000

(h)

Decrease in capital (Drawings)

 

                 

(3,000)

 

Decrease in cash

(3,000)

 

 

 

 

 

 

 

 

 

 

   

1,32,500

+

32,500

+

NIL

+

10,000

=

NIL

+

1,75,000

                         

 

 

Page No 89:

Question 4:

Rohit has the following transactions:

 

 

Rs

(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 Rs 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.

 

 

Answer:

S.No.

Explanation

Assets

 

Liabilities

+

Capital

Cash

+

Machinery

+

Stock

=

Creditors

+

Unaccrued Income

   

(a)

Increase in cash

1,50,000

           

 

 

 

 

 

Increase in capital

 

 

 

 

 

 

 

 

 

 

1,50,000

 

 

1,50,000

       

=

NIL

 

 

+

1,50,000

(b)

Increase in machinery

   

40,000

       

 

 

 

 

 

Increase in creditors

 

 

 

 

 

=

40,000

 

 

 

 

 

 

1,50,000

+

40,000

   

=

40,000

 

 

+

1,50,000

(c)

Increase in stock

       

20,000

   

 

 

 

 

 

Decrease in cash

(20,000)

 

 

 

 

 

 

 

 

 

 

 

 

1,30,000

+

40,000

+

20,000

=

40,000

 

 

+

1,50,000

(d)

Decrease in cash

(80,000)

           

 

 

 

 

 

Decrease in capital (Drawings)

 

 

 

 

 

 

 

 

 

 

(80,000)

   

50,000

+

40,000

+

20,000

=

40,000

 

 

+

70,000

(e)

Decrease in creditors

 

         

(40,000)

 

 

 

 

 

Decrease in cash

(38,000)

           

 

 

 

 

 

Increase in capital

(Discount received)

 

 

 

 

 

 

 

 

 

 

2,000

   

12,000

+

40,000

+

20,000

=

NIL

 

 

+

72,000

(f)

Increase in cash

4,500

           

 

 

 

 

 

Decrease in stock

 

     

(5,000)

   

 

 

 

 

 

Decrease in capital (Loss)

 

 

 

 

 

 

 

 

 

 

(500)

   

16,500

+

40,000

+

15,000

=

NIL

 

 

+

71,500

(g)

Decrease in cash

(1,000)

           

 

 

 

 

 

Decrease in capital (Expense)

 

 

 

 

 

 

 

 

 

 

(1,000)

   

15,500

+

40,000

+

15,000

=

NIL

 

 

+

70,500

(h)

Increase in cash

2,000

           

 

 

 

 

 

Increase in unaccrued income

 

 

 

 

 

=

 

 

2,000

 

 

 

 

17,500

+

40,000

+

15,000

=

NIL

+

2,000

+

70,500

                     
                         

 

 

Page No 89:

Question 5:

Use accounting equation to show the effect of the following transactions of M/s Royal Traders:

 

 

Rs

(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 Rs 5,000)

 7,000

(h)

Goods destroyed by fire

 500

 

 

Answer:

S.No.

Explanation

Assets

=

Liabilities

+

Capital

Cash

+

Stock

+

Prepaid Expenses

 

Outstanding Expenses

 

 

(a)

Increase in cash

1,20,000

             

 

 

Increase in capital

 

 

 

 

 

 

 

 

1,20,000

 

 

1,20,000

       

=

NIL

+

1,20,000

(b)

Increase in stock

   

10,000

         

 

 

Increase in cash

(10,000)

 

 

 

 

=

 

 

 

 

 

1,10,000

+

10,000

   

=

NIL

+

1,20,000

(c)

Increase in cash

5,000

             

 

 

Increase in capital (Profit)

               

5,000

   

 

 

 

 

 

 

 

 

 

 

 

1,15,000

+

10,000

   

=

NIL

+

1,25,000

(d)

Increase in outstanding expenses

         

=

2,000

 

 

 

Decrease in capital (Expense)

 

 

 

 

 

 

 

 

(2,000)

   

1,15,000

+

10,000

   

=

2,000

+

1,23,000

(e)

Increase in prepaid expenses

 

     

1,000

     

 

 

Decrease in cash

(1,000)

             

 

   

1,14,000

+

10,000

+

1,000

=

2,000

+

1,23,000

(f)

Increase in cash

700

             

 

 

Increase in capital (Profit)

 

             

700

   

1,14,700

+

10,000

+

1,000

=

2,000

+

1,23,700

(g)

Increase in cash

7,000

             

 

 

Decrease in stock

 

 

(5,000)

         

 

 

Increase in capital (Profit)

 

 

 

 

 

 

 

 

2,000

   

1,21,700

+

5,000

+

1,000

=

2,000

+

1,25,700

(h)

Decrease in stock

 

 

(500)

         

 

 

Decrease in capital (Loss)

 

 

 

 

 

=

 

 

(500)

 

 

1,21,700

+

4,500

+

1,000

=

2,000

+

1,25,200

                     

 

 



Page No 90:

Question 6:

Show the accounting equation on the basis of the following transaction:

 

 

 

(a)

Udit started business with:

Rs

 

(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 Rs 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

 

 

Answer:

S.No.

Explanation

Assets

=

Liabilities

+

Capital

Cash

+

Stock

+

Building

+

Debtors

 

Creditors

+

Outstanding Expenses

+

Unaccrued Income

 

 

(a)

Increase in cash

5,00,000

                         

 

 

Increase in stock

   

1,00,000

                     

 

 

Increase in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,00,000

 

 

5,00,000

+

1,00,000

       

=

NIL

       

+

6,00,000

(b)

Increase in building

       

2,00,000

                 

 

 

Decrease in cash

(2,00,000)

 

 

 

 

 

 

 

=

 

 

 

 

 

 

 

 

 

3,00,000

+

1,00,000

+

2,00,000

   

=

NIL

     

 

+

6,00,000

(c)

Increase in stock

   

50,000

                     

 

 

Increase in creditors

             

=

50,000

         

 

 

 

3,00,000

+

1,50,000 

+

2,00,000

 

 

=

50,000

 

 

 

 

+

6,00,000

(d)

Increase in debtors

           

 36,000

             

 

 

Decrease in stock

   

(25,000)

                     

 

 

Increase in capital (Profit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,000

   

3,00,000

+

1,25,000

+

2,00,000

+

 36,000

=

50,000

       

+

6,11,000

(e)

Decrease in cash

(3,000)

                         

 

 

Decrease in capital (Expense)

 

                         

(3,000)

   

2,97,000

+

1,25,000

+

2,00,000

+

36,000

=

50,000

+

 

 

 

+

6,08,000

(f)

Decrease in capital (Expense)

 

                 

5,000

     

 

 

Increase in liabilities

 

                         

(5,000)

   

2,97,000

+

1,25,000

+

2,00,000

+

36,000

=

50,000

+

5,000

 

 

+

6,03,000

(g)

Decrease in building

 

     

(8,000)

                 

 

 

Decrease in capital

 

                         

(8,000)

   

2,97,000

+

1,25,000

+

1,92,000

+

36,000

=

50,000

+

5,000

 

 

+

5,95,000

(h)

Decrease in cash

(20,000)

                         

 

 

Decrease in capital

 

                         

(20,000)

   

2,97,000

+

1,25,000

+

1,92,000

+

36,000

=

50,000

+

5,000

 

 

+

5,75,000

(i)

Increase in cash

5,000

                         

 

 

Increase in liability

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

   

2,82,000

+

1,25,000

+

1,92,000

+

36,000

=

50,000

+

5,000

+

5,000

+

5,75,000

(j)

Decrease in creditors

 

             

(20,000)

         

 

 

Decrease in cash

(20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

2,62,000

+

1,25,000

+

1,92,000

+

36,000

=

30,000

+

5,000

+

5,000

+

5,75,000

(k)

Increase in cash

30,000

                         

 

 

Decrease in debtors

 

 

 

 

 

 

(30,000)

 

 

 

 

 

 

 

 

 

 

2,92,000

+

1,25,000

+

1,92,000

+

6,000

=

30,000

+

5,000

+

5,000

+

5,75,000

                                 

 

Page No 90:

Question 7:

Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation:

 

 

Rs

(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 house hold Expenses

7,000

(g)

Sold goods for cash (costing Rs 10,000)

14,000

(h)

(i)

Cash paid to Ragani

Deposited into bank

35,000

20,000

 

 

Answer:

S.No.

Explanation

Assets

=

Liabilities

+

Capital

Cash

+

Stock

+

Investment

+

Bank

 

Creditors

 

 

(a)

 Increase in cash

1,20,000

                 

 

 

 Increase in capital

 

 

 

 

 

 

 

 

 

 

1,20,000

­­­­­­

 

1,20,000

+

         

=

NIL

+

1,20,000

(b)

 Increase in cash

10,000

                 

 

 

 Increase in capital (Income)

 

 

 

 

 

 

 

=

 

 

10,000

 

 

1,30,000

           

=

NIL

+

1,30,000

(c)

 Decrease in investment

       

50,000

         

 

 

 Decrease in cash

(50,000)

           

=

   

 

 

 

80,000

+

 

 

50,000

 

 

=

NIL

+

1,30,000

(d)

 Increase in cash

5,000

                 

 

 

 Increase in capital (Income)

                   

5,000

   

85,000

+

 

 

50,000

 

 

=

NIL

+

1,35,000

(e)

 Increase in stock

 

 

35,000

             

 

 

 Increase in creditor (Ragani)

 

             

35,000

 

 

   

85,000

+

35,000

+

50,000

 

 

=

35,000

+

1,35,000

(f)

 Decrease in capital

 

                 

(7,000)

 

 Decrease in cash

 (7,000)

                 

 

   

78,000

+

35,000

+

50,000

 

 

=

35,000

+

1,28,000

(g)

 Increase in cash

14,000

                 

 

 

 Decrease in stock

 

 

(10,000)

             

 

 

 Increase in capital (Profit)

 

                 

4,000

   

92,000

+

25,000

+

50,000

 

 

=

35,000

+

1,32,000

(h)

 Decrease in creditors (Ragani)

 

             

(35,000)

 

 

 

 Decrease in cash

(35,000)

                 

 

   

57,000

+

25,000

+

50,000

 

 

=

NIL

+

1,32,000

(i)

 Decrease in cash

(20,000)

                 

 

 

 Increase in bank

 

 

 

 

 

 

20,000

 

 

 

 

 

 

37,000

+

25,000

+

50,000

+

20,000

=

NIL

+

1,32,000

                         

 

Page No 90:

Question 8:

Show the effect of following transaction on the accounting equation:

 

 

Rs

(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 Rs 20,000)

35,000

(d)

He purchased goods from Rahul

55,000

(e)

He sold goods to Varun (Costing Rs 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

 

 

Answer:

S.No.

Explanation

Assets

   

=