RECORDING OF TRANSACTIONS

ACCOUNTING EQUATION

An accounting equation is based on the dual concept of accounting. According to this concept every transaction has two aspects - Debit and Credit.

Assets = Capital + Liabilities

A transaction may affect either both sides of the equation by the same amount or one side of the equation only, by both increasing or decreasing it by equal amount. It can be said "Accounting equation holds good under all circumstances."

1. Analysis of Business Transactions :

A.  Commenced business with Cash Rs. 2,00,000.

This transactions will affect the assets as the firm is receiving asset in the form of Cash and the owner of the business has invested amount, this will affect the Capital of the business

	ASSETS	=	CAPITAL + LIABILITIES
	Cash
Transaction	2,00,000	=	2,00,000 + 0

B.  Bought goods from Ram Rs. 25,000.

This transaction will affect both assets as well as liabilities of the business. The goods and Creditors are increasing.

ASSETS				=	CAPITAL + LIABILITIES
	Cash		Goods			Creditors
Old Equation	2,00,000			=	2,00,000	+ 0
Transactions	0	+ 25,000			0	+ 25,000
New Eq.	2,00,000 + 25,000			=	2,00,000	+ 25,000

2. Transactions affecting only assets side of the equation :

A. Bought goods for Cash Rs. 35,000

This transaction will affect the Cash and Goods by Rs. 35,000. the firm is paying the money resulting in decrease of Cash. Goods are increasing.

ASSETS			=	CAPITAL + LIABILITIES
	Cash	Goods			Creditors
Old Equation	2,00,000 + 25,000		=	2,00,000	+25,000
Transaction	–35,000 + 35,000			0	+  0
New Eq.	1,65,000 + 60,000		=	2,00,000	+ 25,000

B. Bought Furniture for cash Rs. 50,000

This transactions has brought about two changes in the assets side only. One asset i.e. Cash is decreasing and other asset i.e. Furniture is increasing.

ASSETS				=	CAPITAL + LIABILITIES
	Cash	Goods	Furniture				Creditors
Old Equation	1,65,000 + 60,000			=	2,00,000	+25,000
Transaction	–50,000 + 0		+ 50,000		0	+	0
New Eq.	1,15,000 + 60,000		+ 50,000	=	2,00,000	+ 25,000

3. Transactions affecting only liabilities side of the equation

A. Accepted a bill drawn by Ram for Rs. 25,000 for 3 months.

This transaction will affect Creditors and Bills Payable. As one liability i.e. Creditor is decreasing and other liability i.e. Bills payable is increasing.

	ASSETS			=	CAPITAL + LIABILITIES
	Cash	Goods		Furniture			Creditors + B/P
Old Equation	1,15,000 + 60,000			+ 50,000		=	2,00,000 + 25,000
Transaction	0	+	0	+	0	=	– 25,000 + 25,000
New Eq.	1,15,000 + 60,000			+ 50,000		=	2,00,000 +   0	+ 25,000

4. Transaction affecting the Capital only

A. Interest on Capital provided Rs. 2000

	ASSETS			=	CAPITAL + LIABILITIES
		Cash	Goods		Furniture			Creditors + B/P
Old Equation		1,15,000 +		60,000 + 50,000			=	2,00,000 + 0  + 25,000
Transaction		0	+	0	+	0	=	– 2000
								+ 2000
New Eq.	1,15,000 + 60,000				+ 50,000		=	2,00,000 +  0  + 25,000

B. Interest on Drawings charged Rs. 1000

	ASSETS						=	CAPITAL + LIABILITIES
		Cash	Goods		Furniture			Creditors + B/P
Old Equation		1,15,000 +		60,000 + 50,000			=	2,00,000	+	0	+ 25000
Transaction		0	+	0	+  0		=	– 1000
								+ 1000
New Eq.		1,15,000 +		60,000		+ 50,000 =		2,00,000	+	0	+  25,000

In the above transactions, Capital is increasing and decreasing at the same time. It is owner's duty to pay all the expenses and it is the owner who takes all the profits arising out of business.

5. Transactions related to Expenses

A. Salary Paid Rs. 5000

ASSETS			=   CAPITAL + LIABILITIES
	Cash	Goods	Furniture		Creditors + B/P
Old Equation	1,15,000 + 60,000  + 50,000			=	2,00,000	+  0	+  25,000
Transaction	– 5000			=	– 5000
New Eq.	1,10,000 + 60,000  + 50,000			=	1,95,000	+  0	+  25,000

This transaction affects cash and capital because Cash is decreasing and Capital (Owner) is responsible to pay all the expenses.

6. Transactions related to Income

A.  Commission Received			Rs. 2000
ASSETS			=   CAPITAL + LIABILITIES
	Cash	Goods	Furniture		Creditors + B/P
Old Equation	110000  + 60000		+ 50,000	=	200,000	+  0	+  25000
Transactions	+ 2000			=	+ 2000
New Eq.	112000 + 60000		+ 50,000	=	197,000	+  0	+  25000

This transaction affects cash and capital because Cash is increasing and Capital (Owner) is rightful for every income.

 

 

CBSE Accountancy Class XI ( By Mr. Aniruddh Maheshwari ) 
Email Id : [email protected]