CHAPTER 6 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 Balance Sheet. An example
of a simple Balance Sheet in T form is given below :—
BALANCE SHEET

CAPITAL & LIABILITIES Rs. ASSETS Rs.

Capital 60,000 Cash & Bank

Debtors

Liabilities :— Stock in Trade 1,00,000

Creditors 40,000 Furniture

Bank Overdraft Machinery

Building

1,00,000 1,00,000

In the above Balance Sheet assets are recorded on the right hand side and capital and liabilities are
recorded on the left hand side. At any point of time, the total of the both sides of the Balance Sheet is always
equal because the assets of a business are purchased either from the funds (capital) supplied by the
proprietor or from the funds provided by external parties. The above balance sheet discloses that there are
total assets worth Rs. 1,00,000, out of which assets worth Rs.60,000 have been purchased from the capital
provided by the proprietor and the remaining Rs.40,000 worth of assets have been purchased by the funds
provided by external parties.
The above position can be expressed in the form of an accounting equation ;—

Assets = Liabilities + Capital

Rs. 1,00,000 = Rs.40,000 + Rs.60,000

OR

Liabilities = Assets – Capital

Rs.40,000 = Rs. 1,00,000 – Rs.60,000

OR

Capital = Assets – Liabilities

1
Rs.60,000 = Rs. 1,00,000 – Rs.40,000

Accounting equation signifies that the assets of a business are always equal to the total of capital and
liabilities. A business transaction will result in the change in either of the assets, liabilities or capital of the
firm and even after the change the assets will be again equal to the total of capital and liabilities. If a
business transaction results in the increase of assets, there will also be a corresponding increase in the
amount of either capital or liabilities by the same amount.
Effect of Transactions on Accounting Equations
ILLUSTRATION 1
Suppose Gopal starts a new business and the following successive transactions take place :—
Transaction 1 :—Gopal started business with Rs.75,000 as capital.
The effect of the transaction will be that the firm has received assets totalling Rs.75,000 in the form of
cash and the claims against the firm are also Rs.75,000 in the form of capital. The transaction can be
expressed in the form of an accounting equation as follows :—

Assets = Liabilities + Capital

Cash = Liabilities + Capital

75,000 = 0 + 75,000

Transaction 2 :—Gopal purchased furniture for Cash Rs.5,000.

The effect of this transaction is that the cash is reduced by Rs.5,000, but a new asset of the same amount
has been acquired. The transaction decreases one asset and at the 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 + Furniture = Liabilities + 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 Rs.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 + Furniture + Goods = Liabilities + Capital

Cash = 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 =0 + 75,000

Transaction 4 :— Gopal purchased goods on credit for Rs. 16,000.

This transaction will increase goods on the assets side and will create a liability in the form of creditors.
(The persons from whom goods have been purchased on credit are called creditors.) The equation will be as

2
follows :—

Assets = Liabilities + Capital

Cash + Furniture+ Goods = Creditors + Capital

Old Equation 50,000 + 5,000 + 20,000 =0 + 75,000

Transaction 0 + 0 + 16,000 = 16,000 + 0

New Equation 50,000 + 5,000 + 36,000 = 16,000 + 75,000

Transaction 5 :— Goods costing Rs. 12,000 sold on credit for Rs. 15,000.
This transaction will give rise to a new asset in the form of Debtors to the extent of Rs. 15,000. (Debtors
are those persons to whom goods have been sold on credit). But the goods will be reduced only by Rs.
12,000, the cost of goods sold. The net increase in assets Rs.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 = Liabilities + Capital

Cash + Furniture + Goods + Debtors = Creditors + Capital

Old Equation 50,000 + 5,000 + 36,000 + 0 = 16,000 + 75,000

Transaction 0 + 0 - 12,000 + 15,000 = 0 + 3,000

New Equation 50,000 + 5,000 + 24,000 + 15,000 = 16,000 + 78,000

Transaction 6 :— Paid Rs. 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 = Liabilities + Capital

Cash + Furniture + Goods + Debtors = Creditors + Capital

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 as at ……………………..

Liabilities + Capital Rs. Assets Rs.

Creditors 16,000 Cash 49,000

Gopal’s Capital 77,000 Furniture 5,000

Goods 24,000

3
 Debtors 15,000

93,000 93,000

ILLUSTRATION 2.
Show the Accounting Equation on the basis of the following transactions and prepare a Balance Sheet on
the basis of the last new equation :—

Rs.

1. Mukesh started business with cash 80,000

2. Purchased goods for cash 28,000
3. Purchased goods on credit 20,000
4. Purchased furniture for cash 6,000
5. Paid rent 2,000
6. Received Commission 500
7. Withdrew cash for private use 3,000
8. Sold goods on credit (cost price Rs.30,000) 40,000
9. Paid to creditors 15,000

SOLUTION: (2)
ACCOUNTING EQUATION

S. Transaction Assets = Liabilities + Capital

No.

Cash + Stock + Furniture + Debtors = Creditors + Capital

1. Mukesh started business 80,000 + 0 + 0+ 0 = 0 + 80,000

with Rs. 80,000

Equation 80,000 + 0 + 0+ 0 = 0 + 80,000

2. Purchased goods for cash (-) 28,000 + 28,000 + 0+ 0 = 0 + 0

f28,000

New Equation 52,000 + 28,000 + 0+ 0 = 0 + 80,000

3. Purchased goods on credit 0 + 20,000 + 0+ 0 = 20,000 + 0

Rs.20,000

New Equation 52,000 + 48,000 + 0+ 0 = 20,000 + 80,000

4. Purchased furniture for (-) 6,000 + 0 + 6,000 + 0 = 0 + 0

Cash

Rs.6,000

New Equation 46,000 + 48,000 + 6,000 + 0 = 20,000 + 80,000

5. Paid Rent Rs.2,000 (-) 2,000 + 0 + 0+ 0 = 0 (-) 2,000

4
 New Equation 44,000 + 48,000 + 6,000 + 0 = 20,000 + 78,000

6. Received Commission + 500 + 0 .+ 0+ 0 = 0 + 500

Rs.500

New Equation 44,500 + 48,000 + 6,000 + 0 = 20,000 + 78,500

7. Withdrew Cash for private

use

Rs.3,000 (-) 3,000 + 0 + 0+ 0 = 0 (-) 3,000

New Equation 41,500 + 48,000 + 6,000 + 0 = 20,000 + 75,500

8. Sold goods on credit for 0 – 30,000 + 0+ 40,000 = 0 + 10,000

Rs.40,000 (Cost
Rs.30,000)

New Equation 41,500 + 18,000 + 6,000 + 40,000 = 20,000 + 85,500

9. Paid to Creditors Rs. (-) 15,000 + 0 + 0+ 0 = (-)15,000 + 0

15,000

Final Equation 26,500 + 18,000 + 6,000 + 40,000 = 5,000 + 85,500

EXPLANATION

Serial Transactions Accounts Affected

No.
Assets Liabilities and Capital

1. Capital brought in Cash increases Capital increases

2. Purchased goods for cash Stock increases Cash decreases .

3. Purchased goods on credit Stock increases Creditors increase

4. Purchased furniture for cash Cash decreases Furniture

increases

5. Paid rent Cash decreases Rent = Expenses Therefore,

Capital decreases

6. Received Commission Cash increases Commission = Income

Therefore, Capital increases

7. Withdrew cash for private use Cash decreases Capital decreases

8. Sold goods on credit for Debtors increase by Rs.40,000. Capital increases by Rs. 10,000
Rs.40,000 (Cost price Stock decreases by Rs.30,000
Rs.30,000)

9. Paid to creditors Cash decreases Creditors decrease

5
 BALANCE SHEET OF MUKESH as at……………………

Liabilities + Capital Amount Assets Amount

Rs. Rs.

Creditors 5,000 Cash 26,500

Capital 85,500 Stock 18,000

Furniture 6,000

Debtors 40,000

90,500 90,500

ILLUSTRATION 3.
Prepare ‘Accounting Equation’ from the following :
(a) Started business with cash Rs. 1,00,000.
(b) Purchased goods for cash Rs.20,000 and on credit Rs.30,000.
(c) Sold goods for cash costing Rs. 10,000 and on credit costing Rs. 15,000 both at a profit of 20%.
(Chandigarh, 2018)
SOLUTION : (3)
ACCOUNTING EQUATION

S. Transaction Assets = Liabilities + Capital

No.

Cash + Stock + Debtors = Creditors + Capital

(a) Started business with Cash 1,00,000 + 0 + 0= 0 + 1,00,000

Equation 1,00,000 0 + 0= 0 + 1.00,000

(b) Purchased goods for Cash (--) 20,000 + 50,000 + 0= 30,000 + 0

Rs.20,000 and on Credit
Rs.30,000

New Equation 80,000 + 50,000 + 0= 30,000 + 1,00,000

(.0 Sold goods for Cash costing (+) 12,000 (-) 25,000 + 18,000 = 0 5,000
Rs. 10,000 and on Credit
costing Rs. 15,000 both at a
profit of 20%

Final Equation 92,000 + 25,000 + 18,000 = 30,000 1,05,000

Working Notes:
(!) Goods costing Rs.10,000 sold at a profit of 20%
20
Profit = 10,000 × 100 = 2,000; Sale Price 10,000 + 2,000 = 12,000
(ii) Goods costing Rs.15,000 sold at a profit of 20%

6
 20
Profit = 15,000 × 100 = 3,000; Sale Price 15,000 + 3,000 = 18,000
(iii) Profit on sale Rs.2,000 + Rs.3,000 = Rs.5,000 is added to Capital.
ILLUSTRATION 4.
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) Purchased goods on credit from Ragani 35,000

(f) Paid cash for household expenses 7,000

(g) Sold goods for cash (costing Rs. 10,000) 14,000

(h) Cash paid to Ragani 35,000

(i) Deposited into bank 20,000

(Solution on Next Page)

ILLUSTRATION 5.
Transactions of M/s Vipin Traders are given below :
Show the effects on Assets, Liabilities and Capital with the help of accounting equation.
Rs.

(a) Business started with cash 1,25,000

(b) Purchased goods for cash 50,000

(c) Purchased furniture from R.K. Furniture on Credit 10,000

(d) Sold goods to Parul Traders (Costing Rs.7,000 vide bill no. 5,674) 9,000

(e) Paid cartage 100

(f) Cash Paid to R.K. Furniture in full settlement 9,700

(g) Cash sales (costing Rs. 10,000) 12,000

(h) Rent received 4,000

(i) Cash withdrew for personal use 3,000

(Solution on Next Page)

7
ILLUSTRATION 6.
Prove that Accounting Equation is satisfied in all the following transactions of Sameer Goel :
(i) Started business with Cash Rs. 1,00,000.
(ii) Paid rent in advance Rs.3,000.
(iii) Purchased goods for cash Rs.50,000 and Credit Rs.20,000.
(iv) Sold goods for Cash Rs.80,000 costing Rs.40,000.
(v) Paid salary in cash Rs.4,500 and salary outstanding Rs. 1,000.
(vi) Bought motor cycle for personal use Rs.30,000.
(Solution on Page 6.11)
SOLUTION : (4)
ACCOUNTING EQUATION

S.N Assets = Liabilities + Capital

o.

Cash + Shares + Stock + Bank = Creditors + Capital

(a) Started business 1,20,000 + 0 + 0 + 0 = 0 + 1,20,000

with Cash Rs.
1,20,000

Equation 1,20,000 + 0 + 0 + 0 = 0 + 1,20,000

(b) Rent received + 10,000 + 0 + 0 + 0 = 0 + 10,000

Rs. 10,000

New Equation 1,30,000 + 0 + 0 + 0 = 0 + 1,30,000

(c) Invested in (-) 50,000 + 50,000 + 0 + 0 = 0 + 0

shares Rs.50,000

New Equation 80,000 + 50,000 + 0 + 0 = 0 + 1,30,000

(d) Received (+) 5,000 + 0 + 0 + 0 = 0 + 5,000

Dividend
Rs.5,000

New Equation 85,000 + 50,000 + 0 + 0 = 0 + 1,35,000

(e) Purchased goods 0 + 0 + 35,000 + 0 = 35,000 + 0

on credit
Rs.35,000

New Equation 85,000 + 50,000 + 35,000 + 0 = 35,000 + 1,35,000

(f) Paid cash for (-) 7,000 + 0 + 0 + 0 = 0 (-) 7,000

household
expenses Rs.
7,000

8
 New Equation 78,000 + 50,000 + 35,000 + 0 = 35,000 + 1,28,000

(g) Sold goods for (+) + 0 (-) 10,000 + 0 = 0 + 4,000

cash (Costing 14,000
Rs.10,000) for
Rs. 14,000

New Equation 92,000 + 50,000 + 25,000 + 0 = 35,000 + 1,32,000

(h) Cash paid to (-) 35,000 + 0 + 0 + 0 = (-)35,000 + 0

Ragani
Rs.35,000

New Equation 57,000 + 50,000 + 25,000 + 0 = 0 + 1,32,000

(i) Deposited into (-) 20,000 + 0 + 0 + 20,000 = 0 + 0

bank Rs. 20,000

Final Equation 37,000 + 50,000 + 25,000 + 20,000 = 0 + 1,32,000

SOLUTION : (5) ACCOUNTING EQUATION

S.No. Transaction Assets Liabilities + Capital

Cash + Stock + Furniture + Debtors = Creditors + Capital

(a) Started business with

Cash

Rs. 1,25,000 1,25,000 + 0+ 0+ 0 = 0 + 1,25,000

Equation 1,25,000 + 0 0+ 0 =- 0 + 1,25,000

(b) Purchased goods for (-) 50,000 + 50,000 + 0+ 0 = 0 + 0

cash

Rs.50,000

New Equation 75,000 + 50,000 + 0+ 0 = 0 + 1,25,000

(c) Purchased Furniture

from R.K.

Furniture Rs. 10,000 0 + 0+ 10,000 + 0 = 10,000 + 0

New Equation 75,000 + 50,000 + 10,000 + 0 = 10,000 + 1,25,000

(d) Sold goods to Parul

Traders

Costing Rs.7,000 for 0 (-) 7,000 + 0+ 9,000 = 0 + 2,000

Rs.9,000

New Equation 75,000 + 43,000 + 10,000 + 9,000 = 10,000 + 1,27,000

(e) Paid Cartage Rs. 100 (-) 100 + 0+ 0+ 0 = 0 (-) 100

9
 New Equation 74,900 + 43,000 + 10,000 + 9,000 = 10,000 + 1,26,900

(f) Paid cash to R.K. (-) 9,700 + 0+ 0+ 0 = (-)10,000 + 300

Furniture in full
settlement Rs.9,700

New Equation 65,200 + 43,000 + 10,000 + 9,000 = 0 + 1,27,200

(g) Cash sales (Costing Rs. (+) 12,000 (-) 10,000 + 0+ 0 = 0 + 2,000
10,000) for Rs. 12,000

New Equation 77,200 + 33,000 + 10,000 + 9,000 = 0 + 1,29,200

(h) Rent received Rs.4,000 (+) 4,000 + 0+ 0+ 0 = 0 + 4,000

New Equation 81,200 + 33,000 + 10,000 + 9,000 = 0 + 1,33,200

(i) Cash withdrew for

personal use

Rs.3,000 (-) 3,000 + 0+ 0+ 0 = 0 (-) 3,000

Final Equation 78,200 + 33,000 + 10,000 + 9,000 = 0 + 1,30,200

SOLUTION: (6)
ACCOUNTING EQUATION

S. No. Transaction Assets = Liabilities + Capital

(i) Started business with Cash Cash + Stock + Prepaid = Creditors + + Capital
Exp. Outstandi
ng exp.
1,00,000 =0 + 1,00,000

Equation 1,00,000 + 3,000 0 + 1,00,000

(ii) Paid rent in advance* - 3,000

New Equation 97,000 + 70,000 + 3,000 =0 + 1,00,000

{Hi) Purchased goods for
cash Rs.50,000 and credit - 50,000 +0 = 20,000
Rs.20,000

New Equation 47,000

+ 70,000 + 3,000 + = 20,000 + 1,00,000
(tv) Sold goods for cash Rs. + 80,000 - 40,000 0
80,000 costing Rs.40,000
=0 + 40,000

New Equation 1,27,000 + 30,000 + 3,000 = 20,000 + 1,000 + 1,40,000

(v) Paid salary in cash
Rs.4,500 and salary
outstanding* Rs. 1,000
- 4,500 +0 +0 =0 +0 - 5,500

New Equation 1,22,500 + 30,000 + 3,000 = 20,000 + 1,000 + 1,34,500

10
(vi) Bought motor cycle for
personal use Rs.30,000 - 30,000 + 0 +0 =0 +0 - 30,000

Final Equation 92,500 + 30,000 + 3,000 20,000 + 1,000 + 1,04,500

* Students are advised to refer to Chapter 9 for understanding the meaning of advance payments and
outstanding expenses.
ILLUSTRATION 7.
Show the effect of following transactions on the accounting equation :

(1) Manoj started business with Rs.

(i) Cash 2,30,000

(ii) Goods 1,00,000

(iii) Building 2,00,000

(2) He purchased goods for cash 50,000

(3) He sold goods for cash (costing Rs.20,000) 35,000

(4) He purchased goods from Rahul 55,000

(5) He sold goods to Vanin (costing Rs.52,000) 60,000

(6) He paid cash to Rahul in full settlement 53,000

(7) Salary paid by him 20,000

(8) Received cash from Varun in full settlement 59,000

(9) Rent outstanding 3,000

(10) Commission received by him 13,000

(11) Amount withdrawn by him for personal use 20,000

(12) Depreciation charged on building 10,000

(Solution on Next Page)

ILLUSTRATION 8.
Prove that the accounting equation is satisfied in all the following transactions of Sudhir :—
1. Started business with Cash Rs.50,000 and goods Rs.20,000.
2. Bought goods for Cash Rs. 15,000 and on credit for Rs. 10,000.
3. Goods Costing Rs.24,000 sold at a profit of 33 √%. Half the payment received in cash.
4. Purchased furniture for office use Rs.6,000 and for household use of Sudhir Rs.4,000.
(Delhi 2015)
(Solution on Next Page)

11
ILLUSTRATION 9.
If the Capital of a business is Rs. 1,00,000 and outside liabilities are Rs.60,000, Calculate total assets of
the business.
SOLUTION;
Assets = Liabilities + Capital
= Rs.60,000 + Rs.1,00,000 = Rs. 1,60,000
SOLUTION: (7)
ACCOUNTING EQUATION

S. Transaction Assets = Liabilities + Capital

No.

(1) Started business with Cash + Stock + Building + Debtors = + + Capital

Cash, goods and Creditors Outstandi + 5,30,000
building = 0 ng exp.
2,30,000 + 1,00,000 + 2,00,000

(2) Equation 2,30,000 + 1,00,000 + 2,00,000 = + 5,30,000

Purchased goods for
Cash - 50,000 + 50,000 +0 +0

(3) New Equation 1,80,000 + 1,50,000 + 2,00,000 = + 5,30,000

Sold goods costing
Rs.20,000 for
Rs.35,000 + 35,000 - 20,000 +0 + 15,000

(4) New Equation 2,15,000 + 1,30,000 + 2,00,000 = 55,000 + 5,45,000

Purchased goods from 0 + 55,000 +0 +0
Rahul

New Equation 2,15,000 + 1,85,000 + 2,00,000 = 55,000 + 5,45,000

Sold goods to Varun
costing Rs.52,000 for
Rs.60,000 0 - 52,000 +0 + 60,000 = 0 + 8,000

(6) New Equation Paid 2,15,000 + 1,33,000 + 2,00,000 +60,000 = 55,000 + 5,53,000
cash to Rahul in full + 0 = -55,000
settlement Rs.53,000
- 53,000 +0 +0 + 2,000

(?) New Equation 1,62,000 + 1,33,000 + 2,00,000 + 60,000 = 0 + 5,55,000

Salary paid - 20,000 +0 +0 +0=0 - 20,000

(8) New Equation 1,42,000 + 1,33,000 + 2,00,000 + 60,000 = 0 + 5,35,000

Received cash front
Varun in full
+ 59,000 +0 +0 60,000 = 0 - 1,000
settlement Rs.59,000
New Equation
2,01,000 + 1,33,000 + 2,00,000 +0=0 5,34,000

12
(9) Rent Outstanding* 0+ 0 + 0+ 0 = 0+ 3,000 3,000

New Equation (10) 2,01,000 + 1,33,000 + 2,00,000 + 0 = 0+ .3,000 + 5,31,00

Commission received 0
0+ 0 = 0+ 0
+ 13,000 + 0 + + 13,000

New Equation 2,14,000 + 1.33,000 + 2,00,000 + 0 =. 0+ 3,000 5,44,00

0
(11) Withdrawn for - 20,000 + 0 0+ 0 0+ 0
personal use 20,000
+

New Equation 1,94,000 + 1,3.3,000 + 2,00.000 + 0 = 0 + 3,000 5,24,00

0
(12) Depreciation on 0 +0 - 10,000 +0 0 +0
Building* 10,000

Final Equation 1,94,000 + 1,33,000 + 1,90,000 + 0 = 0 + 3,000 + 5,14,00

0

Note : *Students are advised to refer to Chapter 9 for understanding the meaning of outstanding expenses
and depreciation.
SOLUTION: (8)
ACCOUNTING EQUATION

S. No. Transaction Assets = + Capital

Liabilities

1. Started business with Cash Cash + Stock + Debtors + Furniture = Creditors + Capital
Rs.50,000 and goods Rs.20,000 +0 +0 =0 + 70,000
50,000 + 20,000

Equation 50,000 + 20,000 +0 +0 =0 + 70,000

2. Bought goods for Cash Rs.
15,000 and on credit for Rs. (-) 15,000 + 25,000 +0 +0 = 10,000 + 0
10,000

New Equation 35,000 + 45,000 +0 +0 = 10,000 + 70,000

3. Goods costing Rs. 24,000 sold
at a profit of33j%. Half the + 16,000 - 24,000 + 16,000 +0 =0 + 8,000
payment received in Cash

New Equation 51,000 + 21,000 + 16,000 +0 = 10,000 + 78,000

4. Purchased furniture for office
use Rs.6,000 and for household
use of Sudhir Rs.4,000
(-) 10,000 +0 +0 + 6,000 = 0 (-) 4,000

Final Equation 41,000 + 21,000 + 16,000 + 6,000 10,000 + 74,000

13
ILLUSTRATION 10.
If total assets of a business are Rs.2,00,000 and net worth (Capital) is Rs. 1,50,000, Calculate Creditors.
SOLUTION
Creditors (Liabilities) = Assets - Capital
= Rs.2,00,000 - Rs.1,50,000 = Rs.50,000
ILLUSTRATION 11.
A commenced business on 1st April, 2011 with a Capital of Rs.5,00,000. On 31st March, 2012, his
assets were worth Rs.7,80,000 and liabilities Rs.70,000. Find out his closing capital and profits earned
during the year.
SOLUTION:

Closing Capital = Closing Assets - Closing Liabilities

= Rs.7,80,000 - Rs.70,000 = Rs.7,10,000

Profit = Closing Capital - Opening Capital

= Rs.7,10,000 - Rs.5,00,000 = Rs.2,10,000

ILLUSTRATION 12.
(a) Surender Mohan started business on 1st April, 2011 with Capital of Rs.7,50,000 and a loan of
Rs.2,00,000 taken from Punjab National Bank. On 31 st March, 2012 his assets were Rs.15,00,000. Find
out his Capital on 31st March, 2012 and profits made or losses incurred during the year 2011-12.
(b) If in the above illustration, the proprietor had introduced additional capital of Rs. 1,25,000 and had
withdrawn Rs.40,000 for personal purposes, find out the profit.
SOLUTION:
(a) Closing Capital = Closing Assets - Closing Liabilities
= Rs.15,00,000 - Rs.2,00,000
Rs. 13,00,000
Profit = Closing Capital - Opening Capital
= Rs. 13,00,000 - Rs.7,50,000
= Rs.5,50,000
(b) Profit = Closing Capital + Drawing - Additional Capital - Opening Capital
Rs. 13,00,000 + Rs.40,000 - Rs.1,25,000 - Rs.7,50,000
= Rs.4,65,000
ILLUSTRATION 13.
Give an example for each of the following type of transactions : (i) Increase in one asset, decrease in
another asset.
(ii) Increase in asset, increase in liability.
(iii) Increase in asset, increase in owner’s capital.
(iv) Decrease in asset, decrease in liability.
(v) Decrease in asset, decrease in owner’s capital.

14
SOLUTION:

(i) Purchase of Machinery for Cash : Increase in Machinery and decrease

in Cash

(ii) Purchase of Machinery on Credit : Increase in Machinery and increase in

liability

(iii) Capital introduced by proprietor : Increase in Cash and increase in

Capital

(iv) Payment to Creditors : Decrease in Cash

and decrease in Creditors

(v) Cash withdrawn by proprietor from the business for : Decrease in Cash and decrease in
personal use Capital

Meaning of Debit and Credit

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, the transactions relating to cash are recorded in an account,
entitled ‘Cash Account’ and its format wilt be as given below :—
Debit (Dr.) CASH ACCOUNT Credit (Cr.)

Rs. Rs.

The above account resembles English capital letter ‘T’. As such, it is often called ‘T’ 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 acc ount and when to write on the credit side of
an account. There are two approaches :—
(I) American approach or Modem approach, and
(II) 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 :—
I. Assets Accounts
II. Liabilities Accounts
III. 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 :—
I. 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

15
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 Rs.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 Rs.2,000, the reduction will be
recorded on the credit side of the furniture account.

Dr ASSET ACCOUNT Cr.

Increase in asset will be recorded on this side. Rs. Decrease in asset will be recorded on this Rs.
side.

II. Liabilities Accounts :— 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 Rs.
10,000 from Govind, the account of Govind will be credited since Rs. 10,000 is now owing to him. When
the loan is repaid, the account of Govind will be debited since the liability no longer exists.

Dr. LIABILITY ACCOUNT Cr.

Decrease in liability will be Rs. Increase in liability will be recorded recorded Rs.
on this side. on this side.

III. 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,
i.e., makes drawings, the capital account will be debited.

Dr. CAPITAL ACCOUNT Cr.

Decrease in capital will be recorded on this Rs Increase in capital will be recorded on this Rs.
side. side.

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.

Decrease in gains and incomes will be Rs. Increase in gains and incomes will be Rs.
recorded on this side. recorded on this side.

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.

Increase in losses and expenses will be Rs. Decrease in losses and expenses will be Rs.
recorded on this side. recorded on this side.

The rules given above may be summarised as below :—

1. Debit the increase in assets and Credit the decrease in assets.
2. Credit the increase in liabilities and Debit the decrease in liabilities.
3. Credit the increase in Capital and Debit the decrease in Capital.
4. Credit the increase in Incomes and Debit the decrease in Incomes.
16
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 Cr.

Record increase in these accounts on this Rs. Record decrease in these accounts on this Rs.
side. side.

Dr. LIABILITY, CAPITAL OR INCOME ACCOUNT Cr.

Record decrease in these accounts on this Rs. Record increase in these accounts on this Rs.
side. side.

ILLUSTRATION 14.
On which side will the increase in the following accounts be recorded? Also mention the nature of
Account —

1. Cash 5. Proprietor’s Account

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 15.
On which side the decrease in the following accounts be recorded? Also mention the nature of
Account:—

1. Furniture 4. Salary Paid

2. Bank 5. Salary Outstanding

3. Proprietor’s Account 6. Subhash — a Customer

17
 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

ILLUSTRATION 16.
From the following transactions, state the nature of accounts and state which account will be debited and
which account will be credited :
1. Sahdev started business with cash Rs.5,00,000.
2. Purchased goods for cash Rs.20,000.
3. Purchased goods from Raghubir on credit for Rs.25,000.
4. Purchased furniture from Fancy Furniture House for Rs. 1,50,000 on credit.
5. Sold goods for cash Rs.30,000.
6. Sold goods to Yuvraj on credit for Rs.50,000.
7. Cash paid to Raghubir Rs.20,000.
8. Cash received from Yuvraj Rs. 15,000.
9. Paid rent Rs. 10,000.
SOLUTION:

Transactions Accounts . Nature of Effect on Debit Rs. Credit Rs.

Involved Account . Account

1. Sahdev started business with Cash Cash Asset Increase 5,00,000 5,00,000
Rs.5,00,000 Capital Capital Increase

2. Purchased goods for Cash Rs.20,000 Purchases Expense Increase 20,000 20,000
Cash Asset Decrease

3. Purchased goods from Raghubir on Purchases Expense Increase 25,000 25,000

credit for Rs.25,000
Raghubir Liability Increase

4. Purchased furniture from Fancy Furniture Asset Increase 1,50,000 1,50,000

Furniture House for Rs.1,50,000 on Fancy Liability Increase
credit
Furniture
House

5. Sold goods for cash Rs.30,000 Cash Asset Increase 30,000 30,000
Sales Revenue Increase

6. Sold goods to Yuvraj on credit Yuvraj Asset Increase 50,000 50,000

Rs.50,000 Sales Revenue Increase

7. Cash paid to Raghubir Rs.20,000 Raghubir Liability Decrease 20,000 20,000

18
 Cash Asset , Decrease

8. Cash received from Yuvraj Rs. 15,000 Cash Asset Increase 15,000 15,000
Yuvraj Asset Decrease

9. Paid rent Rs. 10,000 Rent Expense Increase 10,000 10,000

Cash Asset Decrease

ILLUSTRATION 17.
Open T shape account for furniture and write the following on the proper side :
1. Furniture purchased for Rs.20,000
2. Furniture sold costing Rs.5,000
3. Furniture again purchased for Rs.8,000
4. Old Furniture discarded for Rs.2,500
5. Value of Furniture was reduced by Rs.2,000
SOLUTION:

Dr. FURNITURE ACCOUNT Cr.

Rs. Rs.

Record Increase in furniture on this Record decrease in furniture on

side — this side —

1. To Cash - Furniture Purchased 20,000 2. By Cash —- Furniture Sold 5,000

3. To Cash - Furniture Purchased 8,000 4. By Furniture Discarded 2,500

5. By Depreciation 2,000

Total 28,000 Total 9,500

Balance 18,500

28,000 28,000

ILLUSTRATION 18.
Open T shape account of our creditor ‘Sanjay’ and write the following transactions on the proper side :
1. Purchased goods from Sanjay on Credit for Rs.40,000.
2. Paid to Sanjay Rs.25,000.
3. Again purchased goods from Sanjay on Credit for Rs. 16,000.
4. Goods returned to Sanjay for Rs.2,000.
5. Paid to Sanjay Rs. 20,000.
SOLUTION;

Dr. SANJAY (Creditor’s A/c) Cr.

Rs. Rs.

19
Record decrease on this side Record increase on this side

2. To Cash 25,000 1. By Purchases 40,000

4. To Goods Returned 2,000 3. By Purchases 16,000

5. To Cash 20,000

Total 47,000 Total 56,000

Balance 9,000

56,000 56,000

ILLUSTRATION 19.
Put the following on the proper side of Debtor’s A/c, Creditor’s A/c and Cash A/c :—

Rs.

(a) Sold goods for Cash 25,000

(b) Sold goods to X on Credit 40,000

(c) Received cash from X 28,000

(d) Purchased goods from Y on Credit 22,000

(e) Purchased goods from Tfor cash 8,000

(i) Paid to Y 15,000

SOLUTION:

Dr. CASH ACCOUNT Cr.

Rs. Rs.

(a) To Sales 25,000 (e) By Purchases 8,000

(c) To X 28,000 (f) By y 15,000

53,000 23,000

Balance 30,000

53,000 53,000

Dr. X (Debtor’s Account) Cr.

Rs. Rs.

(b) To Sales 40,000 (c) By Cash 28,000

Balance 12,000

20
 40,000 40,000

Dr. Y (Creditor’s Account) Cr.

Rs. Rs.

(f) To Cash 15,000 (ii) By Purchases 22,000

Balance 7,000

22,000 22,000

ILLUSTRATION 20.
From the following particulars prepare the Proprietor’s Capital Account:

2015

April 1 Started business with cash Rs.75,000

June 17 Withdrew from business for personal use Rs.! 0,000

July 31 Life insurance premium paid Rs. 13,000

Sept. 25 Sold personal investments worth Rs. 15,000 at 5% profit and brought into business on the
same date.

Dec. 31 Loss for the year Rs.5,000

(Chandigarh, 2017)
SOLUTION:

Dr. CAPITAL ACCOUNT Cr.

Date Particulars Rs. Date Particulars Rs.

Decrease will be Increase will be

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 × 105/100) 15,750

(Loss) 5,000

Dec. 31 To Balance c/d 62,750

90,750 90,750

SHORT ANSWER QUESTIONS

21
1. Prove that, “Accounting Equation holds good under all circumstances.” Give atleast two illustrations,
2. Give two basic purposes of accounting equation.
Ans. (i) Since accounting equation is always equal it ensures the accuracy in recording of business
transaction.
(ii) It helps in preparation of Balance Sheet.]
3. Describe the fundamental accounting equation. How are revenue and expenses related to it?
4. Which of the following equations are correct ?

I. Assets = Capital + Liabilities

II. Assets = Capital - Liabilities

III. Assets = Liabilities - Capital

IV. Capital = Assets - Liabilities

V. Capital = Assets + Liabilities

VI. Liabilities = Capital + Assets

VII. Liabilities = Capital - Assets

VIII. Liabilities = Assets - Capital

Ans. I, IV, VIII.

5. The position of a businessman on 30th June 1994 was as follows :— Cash Rs.5,000; Debtors Rs.20,000;
Machinery Rs.60,000; Stock Rs.25,000; Capital Rs.75,000. Calculate his liabilities.
Ans. Rs. 3 5,000.
Hint. Liabilities = Assets - Capital
6. What entry (debit or credit) would you make to (a) increase in revenue (b) decrease in expense, (c) record
drawings, (d) record the fresh capital introduced by the owner.
Ans. (a) Increase in Revenue : Credit
(.b) Decrease in Expense : Credit
(c) Drawings : Debit in Capital Account
(d) Fresh Capital : Credit in Capital Account
7. 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?
Ans. Decrease in Asset will be recorded on credit side.
Decrease in Liability will be recorded on debit side.]
8. Which transactions will:
I. Decrease the Assets and Decrease the Capital.
II. Increase the Assets and Increase the Liabilities.
III. Increase the Assets and Decrease another Asset.
IV. Decrease the Assets and Decrease the Liabilities.
Ans. (I) Drawings or Expenses; (II) Purchase of an asset on Credit; (III) Purchase or Sale of an asset in
Cash; (IV) Payment of a liability.]

22
9. What will be the effect of the following on the Accounting Equation :—
1. Purchased goods for Rs.20,000 from Mahesh on Credit.
2. Sold goods to Suresh costing Rs.8,000 for Rs. 10,000 in cash.
3. Paid Wages Rs.500.
4. Withdrew in cash for private use Rs.2,000.
5. Paid to creditors Rs.5,000.

Ans. 1. + Stock + Creditors 2. + Cash - Stock + Capital

3. - Cash - Capital 4. - Cash - Capital

5. - Cash - Creditors]

VERY SHORT ANSWER QUESTIONS

(Questions Carrying 1 Mark)
1. What is an accounting equation?
Ans. An accounting equation is a formula of accounting which shows that the assets of a business are always
equal to the total of capital and liabilities.
2. Give fundamental accounting equation.
Λns. Assets = Liabilities + Capital
3. If the Capital of a business is Rs.5,00,000 and Outside liabilities are Rs.2,00,000, calculate total assets of
the business.
Ans. Total Assets Rs.7,00,000.
4. If total assets of a business are Rs. 10,00,000 and capital is Rs.4,00,000, calculate creditors.
Ans. Creditors Rs.6,00,000
5. ‘X’ commenced business on 1st April, 2013 with a capital of Rs.6,00,000. On 31st March, 2014 his
assets were worth Rs.8,00,000 and liabilities Rs.50,000. Find out his closing capital and profits earned
during the year.
Ans. Closing Capital Rs.7,50,000; Profit Rs.1,50,000.
6. What is Debit?
Ans. When an amount is entered on the left-hand side of an account, it is a debit and the account is said to be
debited.
7. What is Credit?
Ans. When an amount is entered on the right-hand side of an account, it is a credit and the account is said to
be credited.
8. Why are the rules of debit and credit same for both liability and capital?
Ans. Because according to business entity concept capital is also treated as liability of the business.
9. Name the side on which increase in capital is recorded.
Ans. Credit side.

23
 PRACTICAL QUESTIONS
(Question Nos. 1 to 20 are strictly in the serial order of Illustrations)
Q. 1. Prepare Accounting Equation from the following :—

Rs.

1. Sandeep started business will Cash 1,00,000

2. Purchased furniture for cash 5,000

3. Purchased goods for cash 20,000

4. Purchased goods on credit 36,000

5. Paid for rent 700

6. Goods costing Rs.40,000 sold at a profit of 20% for cash

[Ans. Assets : Cash Rs.1,22,300 + Furniture Rs.5,000 + Stock Rs. 16,000 = Liabilities: Creditors
Rs.36,000 + Capital Rs. 1,07,300.]
Q. 2. (A) Show the Accounting Equation on the basis of the following and present a balance sheet on the
last new equation balances :

Rs.

(i) Manu started business with cash 50,000

(ii) Bought furniture for 500
(iii) Purchased goods on credit 4,000
(iv) Sold goods on cash (cost Rs.500) for 700
(v) Received rent 200
(vi) Purchased goods for cash 1,000
(vii) Withdrew for personal use 700
(viii) Paid to creditors 400
(ix) Paid for salaries 200

[Ans. Assets : Cash Rs.48,100 + furniture Rs.500 + stock Rs.4,500 = Liabilities: creditors Rs.3,600 +
capital Rs.49,500; Balance Sheet total Rs.53,100.]
Q. 2. (B) Prove that the Accounting Equation is satisfied in all the following transactions of Rajaram.
Also prepare a Balance Sheet:—
1. Started business with Cash Rs. 1,20,000.
2. Purchased a typewriter for Cash for Rs.8,000 for office use.
3. Purchased goods for Rs. 50,000 for cash.
4. Purchased goods for Rs.40,000 on credit.
5. Goods costing Rs.60,000 sold for Rs.80,000 on credit.
6. Paid for Rent Rs.1,500 and for salaries Rs.2,000.
7. Received Rs.800 for Commission.
8. Withdrew for private use Rs.5,000 in cash.

24
 [Ans. Assets : Cash Rs.54,300 + Typewriter Rs.8,000 + Stock Rs.30,000 + Debtors Rs.80,000 =
Liabilities : Creditors Rs.40,000 + Capital Rs. 1,32,300; Balance Sheet Total Rs. 1,72,300.]
Q. 3. Prepare Accounting Equation from the following :
(a) Started business with Cash Rs.2,00,000.
(b) Purchased goods for Cash Rs.60,000 and on Credit Rs.1,50,000.
(c) Sold goods for Cash costing Rs.40,000 at a profit of 20% and on Credit costing Rs.72,000 at a profit of
25%.
(d) Paid for Rent Rs.5,000.
[Ans. Assets : Cash Rs. 1,83,000 + Stock Rs.98,000 + Debtors Rs.90,000 = Liabilities : Creditors
Rs.1,50,000 + Capital Rs.2,21,000]
Q. 4. 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 purchased goods on credit 40,000

(e) He sold goods (Costing Rs.20,000) for cash 26,000

[Ans. Assets : Cash Rs.2,39,000 + Furniture Rs.35,000 + Stock Rs.20,000 = Liabilities: Creditors Rs.
40,000 + Capital Rs.2,54,000.]
Q. 5. 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) Sold 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

[Ans. Assets : Cash Rs.1,32,500 + Stock Rs.32,500 + Furniture Rs. 10,000 = Capital Rs. 1,75,000.]
Q. 6. What will be the effect of the following on the Accounting Equation?
(i) Harish started business with cash Rs. 1,80,000.
(ii) Purchased goods for cash Rs.60,000 and on credit Rs.30,000.
(iii) Sold goods for cash Rs.40,000; costing Rs.24,000.

25
(iv) Rent paid Rs.5,000; and rent outstanding Rs.2,000.
(v) Sold goods on credit Rs.50,000 (costing Rs.38,000).
(vi) Salary paid in advance Rs.3,000.
[Ans. Assets : Cash Rs.1,52,000 + Stock Rs.28,000 + Debtors Rs.50,000 + Prepaid Expenses Rs.3,000 =
Liabilities : Creditors Rs.30,000 + Outstanding Expenses Rs.2,000 + Capital Rs.2,01,000.]
Q. 7. 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) Received interest 700

(f) Sold goods for cash (costing Rs.5,0001 7,000

(g) Goods destroyed by tire 500

[Ans, Assets : Cash Rs. 1,22,700 + Stock Rs.4,500 = Liabilities : Outstanding Exp. Rs.2,000 + Capita!
Rs. 1,25,200.]
Hint. Goods destroyed by fire will result in decrease in stock and decrease in capital.
Q. 8. (A) Prepare Accounting Equation from the following :—
1. Started business with cash Rs.75,000 and goods Rs.25,000.
2. Paid for Rent Rs.2,000.
3. Bought goods for cash Rs.30,000 and on credit for Rs.44,000.
4. Goods costing Rs.50,000 sold at a profit of 25%, out of which Rs.27,500 received in Cash.
5. Purchased a Motor-cycle for personal use Rs.20,000.
[Ans. Assets : Cash Rs.50,500 + Stock Rs.49,000 + Debtors Rs.35,000 = Liabilities : Creditors
Rs.44,000 + Capital Rs.90,500.]
Q. 8. (B) Prepare Accounting Equation from the following and also prepare a Balance Sheet:—
1. Raghu started business with Cash Rs. 1,50,000.
2. Bought goods for cash Rs.80,000 and on credit for Rs.40,000.
3. Goods costing Rs.75,000 sold at a profit of 33y%. Half the payment received in cash.
4. Goods costing Rs. 10,000 sold for Rs. 12,000 on credit.
5. Paid for Rent Rs.2,000 and for salaries Rs.4,000.
6. Goods costing Rs.20,000 sold for Rs. 18,500 for Cash.
[Ans. Assets : Cash Rs. 1,32,500 + Stock Rs. 15,000 + Debtors Rs.62,000 = Liabilities : Creditors
Rs.40,000 + Capital Rs.1,69,500; Balance Sheet total Rs. 2,09,500.]
Q. 9. If the Capital of a business is Rs. 1,20,000 and Outside liabilities are Rs.20,000, calculate total
assets of the business.
[Ans. Total Assets Rs. 1,40,000.]

26
 Q. 10. If total assets of a business are Rs.1,30,000 and capital is Rs.80,000, calculate creditors.
[Ans. Creditors Rs.50,000.]
Q. 11. ‘A’ commenced his cloth business on 1st April, 2011 with a capital of Rs.3,00,000. On 31st
March, 2012 his assets were worth Rs.5,00,000 and liabilities Rs. 1,00,000. Find out his closing capital and
profits earned during the year.
[Ans. Closing Capital Rs.4,00,000; Profit Rs. 1,00,000.]
Q. 12. (a) Yogesh commenced business on 1st April, 2011 with a Capital of Rs.5,00,000 and a loan of
Rs. 1,00,000 borrowed from Citi Bank. On 31st March, 2012, his assets were Rs.8,00,000. Calculate his
closing capital and profits earned during the year.
(b) If in the above case, the proprietor had introduced fresh capital of Rs.40,000 and had withdrawn Rs.
10,000 for personal purposes, calculate his profits. (KVS 2013) [Ans. (a) Closing Capital Rs.7,00,000; Profit
Rs.2,00,000.
(6) Profit Rs. 1,70,000.]
Q. 13. Give one example of each of the following transactions :
(i) Increase in an asset and a liability.
(ii) Decrease in an asset and a liability.
(iii) Increase in assets and capital.
(iv) Decrease in assets and capital.
[Ans. (i) Purchase of an asset on credit.
(ii) Payment of a liability.
(iii) Capital introduced by proprietor.
(iv) Drawings or Expenses.]
Q. 14. On which side the increase in the following accounts will be recorded? Also mention the nature of
account:—
1. Furniture 5. Proprietor's Account
2. Rent Paid 6. Debtor
3. Commission Received 7. Creditor
4. Salary Paid

[Ans. 1. Debit — Asset 5. Credit — Capital

2. Debit — Expenses 6. Debit v Asset

3. Credit — Income 7. Credit — Liability

4. Debit — Expenses]

Q. 15. On which side the decrease in the following accounts will be recorded? Also mention the nature
of account:—

1. Cash 4. Outstanding Rent

2. Bank Overdraft 5. Prepaid Insurance

3, Rent Paid 6. Manoj, Proprietor of the business

[Ans. 1. Credit — Asset 4. Debit — Liability

27
2. Debit — Liability 5. Credit — Asset

3. Credit — Expenses 6. Debit — Capital]

Q. 16. From the following transactions, state the nature of accounts and state the accounts which will be
debited and credited :
1. Ganesh started business with Cash Rs.2,00,000.
2. Purchased goods for Cash Rs. 60,000.
3. Sold goods for cash Rs.75,000.
4. Purchased goods from Nakul on Credit for Rs.80,000.
5. Sold goods to Bhushan on Credit for Rs.50,000,
6. Paid Cash to Nakul Rs.20,000.
7. Received Cash from Bhushan Rs. 10,000.
8. Paid salary Rs.20,000.
Q. 17, Open ‘T’ shape account for Machinery and write the following on the proper side :

Rs.

1. Machinery purchased for 5,00,000

2. Machinery sold 1,20,000

3. Machinery discarded 50,000

4. New Machinery purchased 2,00,000

5. Machinery destroyed 40,000

[Ans. Debit side 1, 4; Credit side 2, 3, 5.]

Q. 18. Open ‘T’ shape account of our creditor ‘Raghubir and write the following transactions on the
proper side :—
1. Purchased goods from Raghubir on credit for Rs.50,000.
2. Returned goods to Raghubir for Rs.5,000.
3. Paid to Raghubir Rs. 30,000.
4. Purchased goods from Raghubir on credit for Rs. 16,000.
5. Paid to Raghubir Rs.20,000.
[Ans. Debit side 2, 3, 5; Credit side 1, 4.]
Q. 19. Put the following on the proper side of Cash account, Debtor’s account and Creditor’s account:
(a) Sold goods for cash Rs.60,000.
(b) Sold goods to Hari on credit Rs.20,000.
(c) Purchased goods from Krishan on credit Rs.36,000.
(d) Purchased goods from Krishan for cash Rs. 10,000.
(e) Cash received from Hari Rs. 15,000.
(f) Cash paid to Krishan Rs.28,000.
[Ans. Cash A/c Dr. (a), (e)Cr. (d), (f)

28
Hari Dr. (b) Cr. (e)
Krishan Dr. (f) Cr. (c)]
Q. 20. From the following transactions prepare the Proprietor’s Account in T ! shape :

2013 Rs.

April 1 Commenced business with Cash 5,00,000

August 1 Introduced additional Capital 1,00,000

Dec. 31 Drawings 40,000

2014

Feb. 28 Drawings 20,000

March 31 Net Profit shown by Profit & Loss A/c 1,25,000

[Ans. Debit side : Dec. 31; Feb. 28;

Credit side : April 1; August 1; March 31.]
ADDITIONAL QUESTIONS
Q. 21. Prepare the Accounting Equation on the basis of the following :
(a) Started business with cash Rs. 1,40,000 and Stock Rs.2,50,000.
(b) Sold goods (costing Rs.50,000) at a profit of 25% on cost.
(c) Deposited into bank account Rs. 1,80,000.
(d) Purchased goods from Mohan Rs.80,000.
(Delhi 2013)
[Ans. Assets : Cash Rs.22,500 + Stock Rs.2,80,000 + Bank Rs.1,80,000 = Creditors Rs.80,000 + Capital
Rs.4,02,500.]
Q. 22. Prepare Accounting Equation on the basis of the following transactions :
(a) Started business with cash Rs.70,000.
(b) Credit purchase of goods Rs.l 8,000.
(c) Payment made to creditors in full settlement Rs.l7,500.
(d) Purchase of machinery for cash Rs.20,000.
[Ans. Assets : Cash Rs.32,500 + Stock Rs.l8,000 + Machinery Rs.20,000 = Capital Rs. 70,500.)
Q. 23. Prepare accounting equation from the following :
(a) Started business with cash Rs.50,000 and goods Rs.30,000.
(b) Purchased goods for cash Rs.30,000 and on credit from Karan Rs.20,000.
(c) Goods costing Rs.40,000 were sold for Rs.55,000 for cash.
(d) Withdrew cash for personal use Rs. 10,000.
(e) Rent outstanding Rs.2,000.
[Ans. Assets : Cash Rs.65,000 + Stock Rs.40,000 = Liabilities : Creditors Rs.20,000 + Outstanding Rent
Rs.2,000 + Capital Rs.83,000.]
Q. 24. Show the accounting equation on the basis of the following transactions and present a Balance
Sheet of the last new equation balance :
29
 Rs.

(i) Mohan commenced business with 70,000

(ii) Purchased goods on Credit 14,000

(iii) Withdrew for private use 1,700

(iv) Purchased goods for Cash 10,000

(v) Paid wages 300

(vi) Paid to Creditors 10,000

(vii) Sold goods on Credit at par 15,000

(viii) Sold good for Cash (cost price was Rs.3,000) 4,000

(ix) Purchased furniture for cash 500

[Ans. Assets : Cash Rs.51,500 + Stock Rs.6,000 + Debtors Rs. 15,000 + Furniture Rs.500 = Liabilities :
Creditors Rs.4,000 + Capital Rs.69,000; Balance Sheet Total Rs.73,000.]
Q. 25. Prove that the accounting equation is satisfied in the following transactions:—

Rs.

(a) Brij Mohan commenced business with Cash 1,00,000

(b) Bought goods for Cash 60,000

(c) 1
rd of the above goods sold at a profit of 20% on cost.
3

Half the payment received in Cash

(d) Purchased typewriter for office use 15,000

(e) Purchased goods on Credit from X 25,000

(f) Paid to X 15,000

(g) Paid Salary 3,000

(h) Received commission 500

(i) Sold goods for Cash (Cost Rs.50,000) 60,000

[Ans. Assets : Cash Rs.79,500 + Stock Rs. 15,000 + Debtors Rs. 12,000 + Typewriter Rs. 15,000 =
Liabilities : Creditors (X) Rs. 10,000 + Capital Rs.1,11,500.]
Q. 26. Show the accounting equation on the basis of the following transactions and also show the
Balance Sheet:
(i) Started business with Cash Rs.60,000 and Goods Rs.30,000.
(ii) Purchased goods for Cash Rs.40,000 and on Credit Rs.25,000.
1
(iii) Goods costing Rs.48,000 sold at a profit of 333%. Three-fourth payment received in Cash

30
(iv) Goods costing Rs.20,000 sold at a loss of 5%, out of which Rs. 12,000 received in Cash.
(v) Paid Rent Rs.4,000 and Salary Rs.6,000.
(vi) Received Cash from Debtors Rs. 15,000.
(vii) Paid telephone bill amounting to Rs.800.
[Ans. Assets : Cash Rs.84,200 + Stock Rs.27,000 + Debtors Rs.8,000 - Liabilities : Creditors Rs.25,000
+ Capital Rs.94,200; Balance Sheet Total Rs.l,19,200.]
Q. 27. Show the accounting equation on the basis of following transactions :
(i) Commenced business with Cash Rs.20,000; Goods Rs.50,000 and Furniture Rs.30,000.
(ii) Purchased goods from Gopal on Credit Rs.40,000.
(iii) Sold goods for Cash Rs.40,000 (Costing Rs.30,000).
(iv) Sold goods to Ram on Credit Rs.65,000 (Costing Rs.50,000).
(v) Withdrew for personal use goods costing Rs.5,000.
(vi) Purchased typewriter for personal use of the proprietor Rs.20,000.
(vii) Purchased chairs for office use for Cash Rs. 10,000.
(viii) Paid for printing Rs.500 and received Commission Rs. 1,200.
(ix) Introduced fresh Capital Rs.40,000.
(x) Paid to Gopal Rs. 30,000.
[Ans. Assets : Cash Rs.40,700 + Stock Rs.5,000 + Furniture Rs.40,000 + Debtors Rs.65,000 = Liabilities
: Creditors Rs.10,000 + Capital Rs.1,40,700.]
Q. 28. X started a business on 1st April, 2013 with a Capital of Rs. 1,00,000 and a loan of Rs.50,000
from the bank. On 31st March, 2014, his assets were Rs. 1,75,000. Find out his Capital as on 31st March,
2014 and profit earned during the year 2013-14.
[Ans. Closing Capital Rs. 1,25,000; Profit Rs.25,000.]
Q. 29. Y started a business on 1st April, 2013 with a Capital of Rs.2,00,000 and a loan of Rs.75,000
from the bank. During the year, he had introduced additional capital of Rs.60,000 and had withdrawn
Rs.36,000 for personal purposes. On 31st March, 2014 his assets were Rs.3,80,000. Find out his Capital as
on 31st March, 2014 and profit earned during the year 2013-14.
[Ans. Closing Capital Rs.3,05,000; Profit Rs.81,000.]
Q. 30. On which side will the increase in the following accounts be recorded? Also mention the nature of
account:

1. Furniture 5. Proprietor’s Account

2. Wages paid 6. Debtor

3. Rent Received 7. Prepaid Insurance

4. Cash 8. Outstanding Salary

[Ans. 1. Debit —Asset 5. Credit — Capital

2. Debit —Expenses 6. Debit —Asset

3. Credit — Income 7. Debit —Asset

4. Debit —Asset 8, Credit — Liability]

31
 Q. 31. Open ‘T’ shape account for Furniture and write the following on the proper side :—

1. Furniture purchased for Rs.50,000

2. Furniture sold costing Rs.20,000

3. Furniture destroyed by fire Rs. 16,000

4. Furniture again purchased Rs.32,000

5. Old furniture discarded Rs.2,000

6. Value of furniture was reduced by Rs.5,000

[Ans. Debit side : 1, 4; Credit side : 2, 3, 5, 6.]

Q. 32. Open ‘T’ shape account of our Creditor ‘X and write the following transactions on the proper side
:

Rs.

(i) Purchased goods from X on Credit 40,000

(ii) Paid to X 30,000

(iii) Returned goods to X 6,000

(iv) Purchased goods from X for Cash 20,000

(v) Purchased goods from A on Credit 50,000

(vi) Paid to X 45,000

[Ans. Debit side : (ii), (iii), (iv); Credit side : (i), (v).]
Hint: Item No. iv will not be recorded in the account of X.
Q. 33. Open ‘T’ shape account of our Debtor ‘Ram’ and write the following transactions on the proper
side :—

Rs.

(i) Sold goods to Ram on Credit 20,000

(ii) Received from Ram 15,000

(iii) Ram returned goods to us 3,000

(iv) Again sold goods to Ram on Credit 10,000

(v) Ram returned goods to us 1,000

[Ans. Debit side : (i), (iv); Credit side : (ii), (iii), (v).]
Q. 34. Put the following on the proper side of Cash Account, Debtor’s Account and Creditor’s
Account:—

Rs.

32
(a) Sold goods to Shankar on Credit 50,000

(b) Sold goods to Ghanshyam for Cash 30,000

(c) Purchased goods from Mohan on Credit 25,000

(d) Received from Shankar 29,000

(e) Shankar returned goods 1,000

(f) Sold goods to Shankar for Cash 5,000

(g) Returned goods to Mohan 2,000

(h) Paid Rent 4,000

[Ans. Cash A/c Dr. (b), id), if) Dr. (a) Cr. (b)
Shankar Dr. (g) Cr. (d), (e) Cr. (c)]
Mohan

Q. 35. Prove that accounting equation is satisfied in all the following cases :
(a) Commenced business with cash Rs.50,000.
(b) Paid rent Rs.4,000 including Rs. 1,000 as advance.
(c) Bought goods for cash Rs.30,000 and on credit Rs.20,000.
(d) Sold the goods bought on credit for Rs.25,000.
(e) Purchased furniture worth Rs. 10,000 for office use and for Rs.5,000 for domestic use.
(KVS 2014)
[Ans. Assets : Cash Rs.26,000 + Prepaid Exp. Rs. 1,000 + Stock Rs.30,000 + Furniture Rs. 10,000 =
Liabilities : Creditors Rs.20,000 + Capital Rs.47,000.]
Q. 36. Prepare accounting equation from the following :
(i) Started a business with cash Rs. 1,00,000 and goods worth Rs.20,000.
(ii) Sold 50% of above goods at a profit of Rs.2,000 on credit to Ram.
(iii) Rent paid Rs.5,000.
(iv) Ram paid 50% of his balance in cash. (Delhi 2016)
[Ans. Cash Rs. 1,01,000 + Stock Rs. 10,000 + Ram Rs.6,000 = Liabilities : Capital Rs. 1,17,000.]

33