Show the effect of the following transactions on the Accounting Equation:
(i) Started business with cash ₹ 50,000.
(ii) Salaries paid ₹ 2,000.
(iii) Wages Outstanding ₹ 200.
(iv) Interest due but not paid ₹ 100.
(v) Rent paid in advance ₹ 150.
Answer (2)
Each transaction impacts the accounting equation by modifying assets, liabilities, or owner's equity. For instance, starting the business increased both cash assets and owner's equity, while expenses such as salaries reduced them. Overall, the accounting equation remains in balance throughout the transactions.
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To show the effect of each transaction on the Accounting Equation, we will consider the fundamental accounting equation which is: Assets = Liabilities + Equity .
Let's look at each transaction one-by-one:
Started business with cash ₹ 50,000.
Effect on Assets: Increase by ₹ 50,000 (Cash)
Effect on Equity: Increase by ₹ 50,000 (Capital introduced)
Accounting Equation after transaction: Assets = Liabilities + Equity becomes 50 , 000 = 0 + 50 , 000
Salaries paid ₹ 2,000.
Effect on Assets: Decrease by ₹ 2,000 (Cash going out)
Effect on Equity: Decrease by ₹ 2,000 (Expenses)
Accounting Equation after transaction: 48 , 000 = 0 + 48 , 000
Wages Outstanding ₹ 200.
Effect on Liabilities: Increase by ₹ 200 (Wages payable)
No effect on Assets
Equity remains unchanged
Accounting Equation after transaction: 48 , 000 = 200 + 47 , 800
Interest due but not paid ₹ 100.
Effect on Liabilities: Increase by ₹ 100 (Interest payable)
Effect on Equity: Decrease by ₹ 100 (Expenses)
No effect on Assets
Accounting Equation after transaction: 48 , 000 = 300 + 47 , 700
Rent paid in advance ₹ 150.
Effect on Assets: Increase and Decrease both by ₹ 150, cash reduces but prepaid rent (asset) increases
Effect on Equity: No immediate impact
Accounting Equation after transaction: 48 , 000 = 300 + 47 , 700 (Prepaid rent is still an asset, hence it balances out with cash going out)
In summary, we have demonstrated how each transaction impacts the accounting equation, ensuring that at each step, the equation remains balanced.
