Question -

Bobby opened a consulting firm and completed these transactions during November, 2005:
(a) Invested Rs 4,00,000 cash and office equipment with Rs 1,50,000 in a business called Bobbie Consulting.
(b) Purchased land and a small office building. The land was worth Rs 1,50,000 and the building worth Rs 3,50,000. The purchase price was paid with Rs 2,00,000 cash and a long term note payable for Rs 8,00,000.
(c) Purchased office supplies on credit for Rs 12,000.
(d) Bobbie transferred title of motor car to the business. The motor car was worth Rs 90,000.
(e) Purchased for Rs 30,000 additional office equipment on credit.
(f) Paid Rs 75,00 salary to the office manager.
(g) Provided services to a client and collected Rs 30,000
(h) Paid Rs 4,000 for the month’s utilities.
(i) Paid supplier created in transaction (c).
(j) Purchase new office equipment by paying Rs 93,000 cash and trading in old equipment with a recorded cost of Rs 7,000.
(k) Completed services of a client for Rs 26,000. This amount is to be paid within 30 days.
(l) Received Rs 19,000 payment from the client created in transaction (k).
(m) Bobby withdrew Rs 20,000 from the business.
Analyse the above stated transactions and open the following T-accounts:
Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense.

Answer -

Thetransaction (a) increases assets by Rs 5,50,000 (cash Rs 4,00,000 and officeequipment Rs 1,5,000) it will be debited and on the other hand it will increasethe capital by Rs 5,50,000, so it will be credited in capital account.

Cash Account

Office Equipment Account

Capital Account

Dr.

Cr.

Dr.

Cr.

(a)

Rs 4,00,000

(a)

Rs 1,50,000

(a)

Rs 4,00,000

(a)

Rs 1,50,000

Purchaseof land and small office building are assets. On one hand, the purchase ofthese items will increase their individual accounts and this will increase thetotal amount of the assets in the business; so, both the accounts will bedebited. On the other hand, payment in cash on the purchase of these assetswill decrease the cash balance, so cash account will be credited to the extentof amount paid. After payment for building in cash, the balance of buildingaccount will be transferred to creditors for building account. This willincrease the amount of the creditors, which in turn will increase the totalliabilities of the business. Long term payables are regarded as loan to thebusiness that will increase both cash balance (due to intake of loan) as wellas liabilities of the business.

Land Account		Building Account
Dr.	Cr.	Dr.	Cr.
(b)	Rs 1,50,000	(b)	Rs 3,50,000

Cash Account				Long Term Payable Account
Dr.	Cr.			Dr.	Cr.
(a)	Rs 4,00,000	(b)	Rs 1,50,000			(b)	Rs 3,00,000
(b)	Rs 3,00,000	(b)	Rs 50,000

Creditors for Building Account
Dr.		Cr.
	(b)	Rs 3,00,000

Here‘office supplies’ is an expense. So, according to the golden rule, ‘Allexpenses are debited’, it will be debited on one hand while on the other hand,office supplies has been purchased on credit, so it will increase theliability, on account of which, supplier’s account will be credited.

Office Supplies Account			Supplier's Account (Creditors)
Dr.		Cr.	Dr.		Cr.
(c)	Rs 12,000			(c)	Rs 12,000

Amountinvested (motor car) by the proprietor in the business would increase both thecapital and assets.

Motor Car Account			Capital Account
Dr.		Cr.	Dr.		Cr.
(d)	Rs 90,000			(a)	Rs 4,00,000
				(a)	Rs 1,50,000
				(d)	Rs 90,000

Purchaseof additional equipment increases the assets; hence, offices equipment accountwill be debited.

Furtheras the office equipment was purchased on credit, it increases the amount of thecreditors for office equipment and the creditors account will be credited.

Office Equipment Account			Creditors for Office Equipment Account
Dr.		Cr.	Dr.		Cr.
(a)	Rs 1,50,000			(e)	Rs 30,000
(e)	Rs 30,000

Salaryis an expense and as all the expenses are debited, so the payment of salary tothe manager will be debited to the salary account. And on the other hand thepayment of the salary in cash decreases the cash balance (Assets) so the cashaccount would be credited (as decrease in assets is credited).

Salary Account			Cash Account
Dr.		Cr.	Dr.			Cr.
(f)	Rs 7,500		(a)	Rs 4,00,000	(b)	Rs 1,50,000
			(b)	Rs 8,00,000	(b)	Rs 50,000
					(f)	Rs 7,500

Amountreceived or receivable from services rendered to the client is revenue for thebusiness. All revenues are to be credited so client service account will becredited.

Onthe other hand, cash received in exchange of services would increase the cashbalance. It would be debited to the cash account.

Client Services Account (Revenue)			Cash Account
Dr.		Cr.	Dr.			Cr.
	(g)	Rs 30,000	(a)	Rs 4,00,000	(b)	Rs 1,50,000
			(b)	Rs 8,00,000	(b)	Rs 50,000
			(g)	Rs 30,000	(f)	Rs 7,500

The‘utilities’ has been treated as a revenue expense. All expenses are to bedebited. Amount paid for utilities would be debited to Utilities account.

Utilitieshave been paid in cash so the cash account will be credited (as this decreasesassets).

Utilities Account			Cash Account
Dr.		Cr.	Dr.			Cr.
(h)	Rs 4,000		(a)	Rs 4,00,000	(b)	Rs 1,50,000
			(b)	Rs 8,00,000	(b)	Rs 50,000
			(g)	Rs 30,000	(f)	Rs 7,500
					(h)	Rs 4,000

Paymentto the supplier (creditors) will be debited. It results in the decrease inliabilities. Further as the payment has been made in cash, so it results indecrease in the cash balance (assets) and hence the cash account will becredited.

Supplier's Account (Creditors)				Cash Account
Dr.			Cr.	Dr.			Cr.
(h)	Rs 12,000	(c)	Rs 12,000	(a)	Rs 4,00,000	(b)	Rs 1,50,000
				(b)	Rs 8,00,000	(b)	Rs 50,000
				(g)	Rs 30,000	(f)	Rs 7,500
						(h)	Rs 4,000
						(i)	Rs 12,000

Purchaseof the equipments will be debited in the Equipment Account (as there isincrease in the assets). Also as the equipments of worth Rs 1,00,000 andRs 93,000 have been purchased for cash and old equipments of worth Rs 7,000have been exchanged so the purchase of the equipments will be debited in theOffice Equipment account and equipment of Rs 7,000 will be credited in the sameaccount.

Office Equipment Account				Cash Account
Dr.			Cr.	Dr.			Cr.
(a)	Rs 1,50,000	(j)	Rs 7,000	(a)	Rs 4,00,000	(b)	Rs 1,50,000
(e)	Rs 30,000			(b)	Rs 8,00,000	(b)	Rs 50,000
(j)	Rs 1,00,000			(g)	Rs 30,000	(f)	Rs 7,500
						(h)	Rs 4,000
						(i)	Rs 12,000
						(j)	Rs 93,000

Receiptfrom ‘Client services’ is revenue. All revenues are credited. The clientservices account will be credited and client is considered as debtors, so theclient account will be debited.

Client Services Account (Revenue)			Client’s Account (Debtor)
Dr.		Cr.	Dr.		Cr.
	(g)	Rs 30,000	(k)	Rs 26,000
	(k)	Rs 26,000

Theclient has been considered as Debtors. The amount received from the client willlead to the decrease in the debtors balance and the client account will becredited. Receipts from the client will increase the cash balance (asset), andhence the cash account will be debited.

Client’s Account (Debtors)				Cash Account
Dr.			Cr.	Dr.			Cr.
(k)	Rs 26,000	(l)	Rs 19,000	(a)	Rs 4,00,000	(b)	Rs 1,50,000
				(b)	Rs 8,00,000	(b)	Rs 50,000
				(g)	Rs 30,000	(f)	Rs 7,500
				(l)	Rs 19,000	(h)	Rs 4,000
						(i)	Rs 12,000
						(j)	Rs 93,000

Theamount withdrawn by the proprietor is considered as ‘drawings’. According tothe Business Entity Concept, drawings decrease the owner’s capital,) Thus thedrawings account will be debited (as decrease in capital is debited). On theother hand as drawings have been made in cash, decrease in cash means cashaccount will be credited with the amount of drawings.

Drawings Account			Cash Account
Dr.		Cr.	Dr.			Cr.
(m)	Rs 20,000		(a)	Rs 4,00,000	(b)	Rs 1,50,000
			(b)	Rs 8,00,000	(b)	Rs 50,000
			(g)	Rs 30,000	(f)	Rs 7,500
			(l)	Rs 19,000	(h)	Rs 4,000
					(i)	Rs 12,000
					(j)	Rs 93,000
					(m)	Rs 20,000

T – Accounts

Capital Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
				(a)	Cash		4,00,000
				(a)	Office Equipment		1,50,000
				(d)	Motor Car		90,000

Office Equipment Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(a)	Capital		1,50,000
(e)	Creditors for office equipment		30,000
(j)	Cash (1,00,000 – 7,000)		93,000

Cash Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(a)	Capital		4,00,000	(b)	Land		1,50,000
(b)	Long term payable		3,00,000	(b)	Building		50,000
(g)	Client Services		30,000	(f)	Salaries		7,500
(i)	Client		19,000	(h)	Utilities		4,000
				(i)	Suppliers		12,000
				(j)	Office Equipment		93,000
				(m)	Drawings		20,000

Land Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(b)	Cash		1,50,000

Building Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(b)	Cash		50,000
(b)	Creditors for Building		3,00,000

Office Supplies Account (Expenses)
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(c)	Supplier		12,000

Motor Car Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(d)	Capital		90,000

Supplier's Account (Creditors)
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(i)	Cash		12,000	(c)	Office Supplies		12,000

Creditors for Office Equipment
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
				(e)	Office equipment		30,000

Salaries Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(f)	Cash		7,500

Client Services Account
Dr.											Cr.
S. No.	Particulars		J.F.		Amount Rs		S. No.	Particulars	J.F.		Amount Rs
							(g)	Cash			30,000
							(k)	Client			26,000

Utilities Account (Expenses)
Dr.										Cr.
S. No.		Particulars		J.F.		Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(h)		Cash				4,000

Client Accounts (Debtors)
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(k)	Client Services		26,000	(l)	Cash		19,000

Drawings Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
(m)	Cash		20,000

Long Term Payable Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
				(b)	Cash		3,00,000

Creditors for Building Account
Dr.							Cr.
S. No.	Particulars	J.F.	Amount Rs	S. No.	Particulars	J.F.	Amount Rs
				(b)	Building		3,00,000

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