FINANCIAL ACCOUNT
ACCOUNTING EQUATION
Effect of Transactions on Accounting Equation
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 amounts.
Transactions from the Accounting Equation viewpoint, can be divided into two, i.e.,
1. Transactions Affecting Two Items and
2. Transactions Affecting More Than Two Items.
Very Short Answer Type Questions :-
Q.1. Briefly explain the Accounting Equation?
Ans. The accounting equation is a mathematical equation which shows that the assets and liabilities of a firm are equal, i.e., Assets = Liabilities + Capital. It is based on Dual Aspect Concept of Accounting.
Q.2. What is meant by owner's capital?
Ans. Owner's capital means balance standing to the credit of Capital Account of the proprietor.
Q.3. Give an example of decrease in an asset and decrease in a liability?
Ans. Cash paid to a credit.
Q.4. Give an example of a transaction where an asset will increase and also the liability?
Ans. Goods purchased on credit.
Q.5. Give an example of a transaction where an asset and owner's capital will increase?
Ans. Capital introduced by the proprietor.
Q.6. Give an example of a transaction due to which owners's capital and an asset will decrease?
Ans. Goods taken by the proprietor for personal use.
Q.7. Which transaction decreases one asset and increases another asset?
Ans. Amount received from a debtor.
Q.8. Give an example of a transaction which increases one liability and decreases another?
Ans. Acceptance of Bills Payable.
Q.9. Give an example of a transaction which has effect on two items on the assets side?
Ans. Sales of goods on credit.
Q.10. Indicate how Accounting Equation is affected if machinery is purchased for cash?
Ans. It will result in cash being reduced and Machinery Account being increased.
Q.11. Indicate how Accounting Equation is affected if cash is received against services rendered?
Ans. Cash increases and so does the capital.
Q.12. Indicate how Accounting Equation is affected if payment is made to a creditor?
Ans. Cash decreases and so does the liability (creditor).
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