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Question -

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

(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

 

 

 

 

 

 

 

 

 

 

 

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