Accounting Equation is also known as Balance Sheet Equation as already discussed in the previous article on Balance Sheet Equation. Here is the break-up analysis of 50 transactions given below, showing the effect of these transactions on Capital, Liability and Asset.

Students can use C + L = A or A - L = C but C + L = A is preferred as it aligns the normal Balance Sheet columns.

The presentation of the effect of transactions can be given in horizontal or vertical form. Here, only horizontal way has been given. Either way the effect is same.

Here’s a breakdown of 50 sample transactions along with their balance sheet equation effects (Assets = Liabilities + Equity):

Effect of 50 Transactions on Accounting Equation

1. Started business with cash.

Cash - Asset - Increase

Capital - Increase

2. Started business with cash, bank balance.

Cash - Asset - Increase,

Bank – Asset- Increase

Capital - Increase

3. Borrowed loan from State Bank of India.

Bank - Asset – Increase,

SBI’s loan – Liability - Increase

4. Borrowed loan from a friend.

Bank - Asset - Increase,

Friend’s loan - Liability - Increase

5. Purchased machinery for cash.

Machinery - Asset - Increase,

Cash - Asset - Decrease

6. Purchased machinery for cash, payment made by cheque.

Machinery - Asset - Increase,

Bank - Asset - Decrease

7. Purchased furniture, payment made by accepting a bill of exchange

Furniture – Asset – Increase,

Bills Payable - Liability - Increase

8. Purchased goods, 50% payment made by cheque.

Stock – Asset - Increase,

Bank - Asset - Decrease,

Creditors - Liability - Increase

9. Goods purchased on credit, now returned.

Creditors - Liability - Decrease,

Stock – Asset - Decrease

10. Sold goods for cash.

Cash - Asset - Increase

Stock – Asset - Decrease

11. Sold goods on credit.

Debtors - Asset - Increase

Stock – Asset - Decrease

12. Sold goods, 50% payment received in cash.

Cash - Asset - Increase

Debtors - Asset - Increase

Stock – Asset - Decrease

13. Payment of an instalment of State bank of India’s loan.

SBI’s loan – Liability – Decrease,

Bank – Asset - Decrease

14. Bills Receivable received from a debtor.

Bills Receivable – Asset – Increase,

Debtors – Asset - Decrease

15. Deposited into Canara bank.

Canara Bank – Asset – Increase,

Cash – Asset - Decrease

16. Withdrew from bank for office use.

Cash - Asset – Increase,

Bank - Asset – Decrease

17. Withdrew from bank for domestic use.

Drawings – Capital – Decrease,

Bank – Asset - Decrease

18. Payment of wages, rent by cheque.

Wages and Rent – Capital (Expenses) – Decrease,

Bank – Asset - Decrease

19. Returned to friend, loan borrowed from him, by cheque.

Friend’s loan – Liability – Decrease,

Bank – Asset - Decrease

20. Bad Debts (Debtors didn’t pay their dues, declared insolvent by court).

Bad Debts – Capital (Expense) – Decrease,

Debtors – Asset - Decrease

21. Cash received from Munim for commission.

Cash – Asset – Increase,

Commission – Capital (Income) - Increase

22. Received rent by cheque

Bank – Asset – Increase,

Rent – Capital (Income) - Increase

23. Goods returned by our customers.

Stock – Asset – Increase,

Debtors – Asset - Decrease

24. Collection of cash from debtors after discount.

Cash - Asset - Increase

Discount Allowed – Capital (Expense) - Decrease

Debtors - Asset - Decrease

25. Payment to creditors after discount.

Creditors - Liability - Decrease

Cash – Asset – Decrease

Discount received – Capital - Increase

26. Depreciation on asset.

Depreciation – Capital (Expense) - Decrease

Asset - Decrease

27. Appreciation to asset.

Asset - Increase

Appreciation – Capital - Increase

28. Interest on Loan.

Interest on Loan – Capital - Decrease

Loan – Liability - Increase

29. Interest on bank deposit.

Bank - Asset - Increase

Interest on Bank Deposit – Capital - Increase

30. Outstanding expenses.

Expenses – Capital - Decrease

Outstanding expenses – Liability - Increase

31. Expenses paid in advance (when these are paid).

Prepaid expenses - Asset - Increase

Cash – Asset - Decrease

32. Accrued Income.

Accrued Income - Asset - Increase

Income – Capital - Increase

33. Income received in advance. (when it is received).

Cash - Asset - Increase

Income received in advance – Liability - Increase

34. Withdrew goods for personal use.

Drawings - Capital - Decrease

Stock – Asset - Decrease

35. Goods given as charity.

Charity – Capital - Decrease

Stock – Asset - Decrease

36. Prepaid Expenses (Adjustment)

Prepaid Expenses - Asset - Increase

Expenses – Capital - Decrease

37. Interest On Capital.

Interest on Capital - Capital – Increase and - Decrease

38. Interest on Drawings.

Interest on Drawings - Capital – Decrease and - Increase

39. Loss By Fire (Theft)

Loss by Fire (Theft) – Capital - Decrease

Stock – Asset - Decrease

40. Received a Cheque from Angad, directly deposited into bank.

Bank - Asset - Increase

Angad – Asset - Decrease

41. Collected accounts Receivable

Cash – Asset – Increase

Accounts Receivable – Asset - Decrease

42. Purchased vehicle with loan

Vehicle – Asset – Increase

Loan – Liability - Increase

43. Owner withdrew cash

Cash – Asset – Decrease

Capital - Decrease

44. Paid off accounts payable

Accounts Payable – Liability – Decrease

Cash/Bank – Asset - Decrease

45. Provided services on credit

Debtors – Asset – Increase

Service Income - Capital - Increase

46. Owner invested additional cash

Cash – Asset – Increase

Capital - Increase

47. Received interest income

Cash – Asset – Increase

Interest - Capital - Increase

48. Paid insurance premium

Insurance – Capital – Decrease

Cash/Bank – Asset - Decrease

49. Paid for software subscription

Software Expenses – Capital – Decrease

Cash – Asset - Decrease

50. Paid for employee medical insurance

Employee Benefit Expenses – Capital – Decrease

Cash – Asset - Decrease

Note:

Name of the expense, asset, liability, debtor, creditor etc. is to be used if given.

For payment Cash/ Bank is to be used depending on the case.

Learning Games and Activities in Accountancy – Class 11

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Double Entry system of Book-keeping requires record of both the aspects of a transaction into accounting books, one Dr. and the other Cr. e.g. Sold goods to Ashok for ₹3,000. In this case Goods worth ₹3,000 are going out of the business and cash ₹3,000 is coming into the business, both must be recorded in accounting books.

Rules of Double Entry

Rules of Double Entry can be studied under two methods:

1. Basic Book-keeping method.

2. Balance Sheet Equation method.

1. Basic Book-keeping method.

Under this method rules are studied on the basis of various types of accounts. Account is the summary of transactions relating to a particular item relating to the business, in ‘T’ form, where left side is used for Debit and right side is used for Credit.

Types of Account:

1. Personal accounts: These accounts are related to the persons or group of persons and can be:

(a) Natural personal accounts like X account, Ashok account.

(b) Artificial Personal accounts like Sharma Brothers account, Ashoka Textiles ltd.

(c) Representative personal accounts like expenses outstanding, Income received in advance.

2. Impersonal accounts: These accounts are other than personal accounts and include:

(a)Real accounts: Related to assets also called property accounts.

(b)Nominal accounts: Related to expenses, Incomes, losses, gains, revenues of the business.

Personal accounts:

Debit the receiver, Credit the giver e.g. if cash is given to Mahesh, Mahesh is receiver so Mahesh account should be debited.

Real accounts:

Debit what comes in, Credit what goes out e.g. If furniture is sold to Ramesh, furniture is going out of the business so Furniture account should be credited.

Nominal Accounts:

Debit the expenses and losses, Credit the Incomes, gains, revenues and profits e.g. if commission is received, Commission account should be credited as it is Income of the business.

Summary of Rules of Double Entry under Basic Bookkeeping Method:

1. Personal accounts: Debit the receiver, Credit the giver.

2. Real accounts: Debit what comes in, Credit what goes out.

3. Nominal Accounts: Debit the expenses and losses; Credit the Incomes, gains, revenues and profits.

2. Balance Sheet Equation Method:

Under this method rules of Double Entry are studied on the basis of the items of Balance Sheet Equation, so all the accounts are divided into five categories for this purpose:

(a) Asset account:

Debit in case of Increase, Credit in case of Decrease like In case machinery is purchased for cash, Machinery account should be debited, and cash account should be credited.

(b) Liability account:

Credit in case of Increase, Debit in case of Decrease like If loan is borrowed from State Bank of India, State bank Of India’s loan account should be credited.

(c) Capital account:

Credit in case of Increase, Debit in case of Decrease like when proprietor invested cash into business, his capital account should be credited.

(d) Expenses/Losses account:

Debit all the expenses/losses (Debit in case of Increase, Credit in case of Decrease.), Expenses are always debited except in case of cancellation like if rent is paid, Rent account should be debited.

(e) Revenues/Gains/Incomes and profits account:

Credit all the revenues/gains/incomes/profits (Credit in case of Increase, Debit in case of Decrease), Incomes accounts are always credited like if rent is received, rent account should be credited.

Summary of Rules of Double Entry under Balance Sheet Equation Method

(a) Asset account: Debit in case of Increase, Credit in case of Decrease.

(b) Liability account: Credit in case of Increase, Debit in case of Decrease.

(c) Capital account: Credit in case of Increase, Debit in case of Decrease.

(d) Expenses/Losses account: Debit (Debit in case of Increase, Credit in case of Decrease).

(e)Revenues/Gains/Incomes and profits account: Credit (Credit in case of Increase, Debit in case of Decrease).

Note: It may be noted that there is no specific instruction for the use of these two methods. The results of these two methods are same. So, either of these two may be used.

Match The Basic Terms with their Meaning

Application of Rules of Debit and Credit

Single Entry System

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Balance sheet equation is also known as Accounting Equation. Total of assets of the business are acquired from the funds of the business. These funds can be the investment by the proprietor i.e. capital or borrowed from some outsider known as Liabilities. It can be put in the form of a simple equation:

Total assets = Capital +Liabilities

OR

Capital + Liabilities = Assets----------------→C+L=A

This equation is known as Balance sheet equation as the Balance Sheet is based on this equation.

Balance Sheet Equation can also be expressed as:

A - L = C

Balance Sheet is a financial statement prepared at the end of the accounting period for the purpose of showing the financial position of an entity in terms of Capital, Liabilities and Assets.

This Equation must stand true in all the cases even after hundreds of transactions.

It means:

Increase in one asset→ Decrease in another asset or Increase in capital/Liabilities and vice versa.

Decrease in one asset→ Increase in another asset or Decrease in capital/Liabilities and vice versa.

In short: C↑-------L↓ or A↑, C↓-------L↑ or A↓, so on.

It becomes important to know when the increase or decrease in these items takes place.

When does increase or decrease in Assets, Capital or Liabilities take place?

Capital increases in the following cases: Introduction of new or additional capital, incomes, gains, profits, revenues.

Capital decreases in the following cases: Drawings, losses, expenses.

Liability increases in the following cases: New or more borrowings, interest thereon, expenses due to be paid, Income received in advance.

Liability decreases in the following cases: Repayment of borrowings.

Asset increases in the following cases: In case of acquiring/ purchase, appreciation.

Asset decreases in the following cases: In case of disposal/sale, depreciation, accident.

Illustration

1. Proprietor started business with cash₹ 20,000.
2. Borrowed from ABC bank ₹15,000.
3. Purchased machinery for cash₹10,000.
4. Purchased goods worth₹6,000 on credit from Seller.
5. Repaid ₹10,000 to ABC bank.
6. A part of machinery worth ₹3,000 was damaged in accident (machinery was not insured).

Here the total of both the sides of Balance sheet equation are same, C+L=A stands at ₹28,000.

Check 50 Transactions and their effect on Balance Sheet Equation to understand it well.

Effect of 50 Transactions on Accounting Equation

Tips for Simple Questions in Accounting Equation

C + L = A

Capital + Liabilities = Assets

As Profit increases Capital and Loss decreases Capital,

(Capital + Profit (- Loss)) + Liabilities = Assets

(Capital + Revenue - Expenses) + Liabilities = Assets

Opening Capital + Additional Capital - Drawings + Profit (- Loss) = Closing Capital

As Capital is also called Owner's Equity and Liabilities are called Creditors' Equity

Owner's Equity + Creditors' Equity = Total Equity = Total Assets

Creditors' Equity is also called Claim of Outsiders.

Very Important:

While doing such questions, The date of balances must be checked carefully.

Double Entry System of Book-Keeping

Learning Games and Activities in Accountancy – Class 11

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(Some simple transactions).

Application of Rules of Debit and Credit - 35 Cases

Rules of Dr./Cr.

Journal

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Source Document or Vouchers are the written evidence of Business transactions, such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc.

When there is no documentary for any items, voucher may be prepared showing the necessary details and got approved by appropriate authority within the firm.

All such documents (vouchers) are arranged in chronological order, serially numbered and kept in a separate file.

Accounting vouchers are prepared to make entries for recording, on the basis of these supporting vouchers.

Accounting vouchers are classified as cash vouchers, debit vouchers, credit vouchers, journal vouchers, etc.

Cash Voucher is used for recording cash transactions; cash receipts or cash payments.

Debit Voucher is used for recording cash payments.

Credit Voucher is used for recording cash receipts.

Transfer Voucher is used to record non-cash transactions like credit purchases, depreciation etc.

Transaction Voucher is the accounting voucher prepared for a transaction with one debit and one credit.

Compound Voucher records a transaction that involves multiple debits/credits and one credit/debit. Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher.

Complex Voucher/ Journal Voucher is used to record transactions with multiple debits and multiple credits, called complex transactions.

Journal I 40 Journal Entries You Must Know

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Journal is the book of original entry in which the transactions are entered for the first time from the source documents, in the form of journal entries, after which the entries are transferred to the ledger, the principal book of entry.

The process of recording transactions in journal is called Journalising.

The process of transferring journal entry to individual accounts in the ledger is called Posting.

How to prepare Journal?

The format of Journal is shown as under:

Date: The first column in a journal is Date on which the transaction took place.

Particulars: The name of the account to be debited is written on the first line beginning from the left-hand corner and the word ‘Dr.’ is written at the end of the column. The name of the account to be credited is written on the second line leaving margin on the left side with a prefix ‘To’.

Narration: A brief description of the transaction is given below these account names.

Line: After writing the narration a line is drawn in the Particulars column, indicating the end of recording the specific journal entry.

Ledger Folio: L.F. records the page number of the ledger book on which relevant account appears. This column is filled up at the time of posting.

Debit Amount: It is the amount against the account to be debited.

Credit Amount: It is the amount against the account to be credited.

At the end of each page of the journal book, the amount columns are totaled and carried forward (c/f to the next page where such amounts are recorded as brought forward (b/f) balances.

Journal

If building worth ₹25,000 is purchased on July2, 2012, payment made by ₹ 25,000 cheque, Journal entry is to be recorded as under:

Journal Entry can be of two types:

1. Simple Journal Entry: It involves only two accounts. (as above)
2. Compound Journal Entry: It involves multiple accounts as there are more than one account to be debited or credited. (As below)

40 Journal Entries You Must Know

It may be noted that both the amount columns are totaled at the end of every page of the Journal.

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The journal is subdivided into a number of books of original entry, on the basis of similarity of transactions and for the purpose of efficiency in the recording work, popularly known as special journals, day books or Subsidiary Journals:

1. Purchases (journal) book

2. Sales (journal) book

3. Purchase Returns (journal) book

4. Sale Returns (journal) book

5. Bills Receivable (journal) book

6. Bills Payable (journal) book

7. Cash book:

(a)Single Column Cash Book

(b)Double Column Cash Book

(c) Triple Column Cash Book

(d) Multi Column Cash Book

(e) Petty Cash Book

8. Journal Proper

Purchases (Journal) Book

All credit purchases of goods are recorded in the purchases journal.

Entries are made with the net amount of the invoice. Trade discount and other details of the invoice need not be recorded in this book.

The format of the purchases journal:

Purchases (Journal) Book

The monthly total of the purchases book is posted to the debit of purchases account in the ledger. Individual suppliers’ accounts may be posted daily.

Purchases Return (Journal) Book

In this book, purchases return of goods are recorded.

The format of the purchases return journal:

Sales (Journal) Book

All credit sales of goods are recorded in the sales journal.

The format of the sales journal:

In the sales journal, one additional column may be added to record sales tax recovered from the customer and to be paid to the government within the stipulated time. Periodically, at the end of each month the amount column is totaled and posted to the credit of sales account in the ledger. Posting to the debit side of individual customer’s accounts may be made daily.

Sales Return (Journal) Book

This journal is used to record return of goods by customers sold to them on credit.

The format of the sales return book is:

Subsidiary Journals MCQs:

Bills Receivable (journal) book:(not in C.B.S.E. syllabus now)

Bills Payable (journal) book:(not in C.B.S.E. syllabus now)

Cash Book – Dual Purpose Book

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Meaning of Cash Book

Cash book is a book generally made on monthly basis, in which all cash transactions i.e. cash receipts and cash payments are recorded and discloses cash and bank balance at the end of the period. It is maintained by all organizations, big or small, profit or not-for-profit.

It serves dual purpose; journal as well as the ledger (cash) account.

Types of Cash Book

Single Column Cash Book

When all receipts and payments are made in cash only, the cash book contains only one amount column on each (debit and credit) side.

The format of single column cash book:

Double Column Cash Book

In this type of cash book, there are two columns of amount cash and bank, on each side of the cash book.

The format of double column cash book:

Triple Column Cash Book

In this type of cash book, there are three columns of amount discount, cash and bank, on each side of the cash book.

The format of triple column cash book:

Types of Cash Book

Contra Entry:

Contra entry is the entry involving cash and bank columns entered on the opposite sides of cash book. There are two cases of passing contra entry:

1. When cash is deposited into bank.
2. When cash is withdrawn from bank for office use.

In case of such entries the word C, which stands for contra is written in the L.F. column indicating that these entries are not to be posted to the ledger account.

Cash Book Entries | 36 Cash Book Transactions

Learning Games and Activities in Accountancy – Class 11

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Whatever may be the type of cash book, entries are passed according to the rules of Double entry. Following main points are to be considered while making entries in cash book:

Summary of Transactions to be recorded in Cash Book

Note:

Cheque received should be debited to Cheques-in-hand. If this cheque is deposited into bank on the same day, It should be debited to Bank. However, if this cheque is deposited into bank the next day, following journal entry is to be passed:

Bank a/c Dr.

To Cheques-in-hand.

How to Make Entries in Cash Book? - 36 Cases

Types of Cash Book

Petty Cash Book

Learning Games and Activities in Accountancy – Class 11

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Petty cash book is used to record small receipts and payments, separately from regular cash book, to avoid making the work of cash book simple and less cumbersome. Petty cashier is appointed in addition to the head cashier.

The petty cashier works on the Imprest system by which, a definite sum called imprest amount, say ₹ 3,000 is given to the petty cashier at the beginning of a certain period usually one month. The petty cashier makes all small payments out of this amount and when he has spent the substantial portion of the imprest amount say ₹ 2,730, he gets reimbursement of the amount spent from the head cashier. Thus, he again has the full imprest amount in the beginning of the next period.

Format of Petty Cash Book:

Journal Proper I General Journal

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