Source Documents and Accounting Equation: NBSE Class 9 BK

Summary

This chapter explains source documents and the accounting equation. Every business does financial transactions like buying, selling, and paying money. These transactions are recorded only when there is proof. Source documents are the proof of these transactions. They show details like date, amount, and people involved.

Source documents have features. They are made when a transaction happens. They are written proof of the transaction. They describe the transaction fully. They help in making vouchers. They are useful for audits and tax checks. Some common source documents are cash memos, invoices, receipts, pay-in-slips, cheques, debit notes, and credit notes. Each has its own purpose and format.

Vouchers are another important part. They are used to record transactions in books. Vouchers come from source documents. They are numbered and written records. They show which accounts to debit or credit. Accountants make them and managers sign them. There are different types of vouchers like cash vouchers, debit vouchers, credit vouchers, and transfer vouchers. Each type has specific uses.

The accounting equation is based on the dual aspect concept. This means every transaction affects two sides. Assets equal liabilities plus capital. Assets are things a business owns. Liabilities are what a business owes. Capital is the owner’s money in the business. Transactions can affect two items or more than two items in the equation.

Rules guide the accounting equation. Adding funds increases capital. Withdrawing funds decreases capital. Profits add to capital while losses reduce it. Interest on capital is an expense but adds to capital. Interest on drawings reduces capital. Getting funds from outsiders increases liabilities. Paying debts decreases liabilities. Buying assets increases them. Selling assets decreases them.

Some transactions affect opposite sides of the equation. Others affect the same side but in opposite ways. For example, buying furniture on credit increases assets and liabilities. Paying creditors decreases both assets and liabilities. The chapter gives examples of how transactions change the equation. It shows calculations and balance sheets.

Transactions are shown through examples. Each example explains how assets, liabilities, and capital change. Starting a business, buying goods, selling goods, and other actions are explained step by step. Each step shows the new balance of assets, liabilities, and capital. Calculations end with a balance sheet showing total assets equal total liabilities and capital.

Textbook solutions

Multiple Choice Questions (MCQs)

1. Credit purchases of furniture will be recorded through which voucher?

(a) Debit Voucher
(b) Credit Voucher
(c) Cash Voucher
(d) Transfer Voucher

Answer : (d) Transfer Voucher

2. Rohan has returned goods worth 6,000 to Kultara as he found it defective. Which document will be prepared by Radheyshyam?

(a) Invoice/bill
(b) Debit note
(c) Credit voucher
(d) Credit note

Answer : (b) Debit note

3. When a trader sells goods on credit, he prepares which contains the name of the party to whom goods are sold, the rate, quantity and the total amount of sale.

(a) Cash memo
(b) Invoice
(c) Debit note
(d) Receipt

Answer : (b) Invoice

4. Pick out a source voucher/document from the following:

(a) Debit Voucher
(b) Credit Voucher
(c) Transfer Voucher
(d) Invoice

Answer : (d) Invoice

5. Credit voucher is prepared by an organisation:

(a) When cash is received
(b) When payment is made
(c) When a transaction involves no cash
(d) When amount is deposited in the bank

Answer : (a) When cash is received

6. A voucher prepared at the time of receipt or payment of cash or cheque is known as:

(a) Debit voucher
(b) Cash voucher
(c) Credit voucher
(d) Transfer voucher

Answer : (b) Cash voucher

7. When we deposit cash or cheque into a bank, which source document is used?

(a) Invoice
(b) Vouchers
(c) Pay-in-slip
(d) Debit note

Answer : (c) Pay-in-slip

8. Point out the correct accounting equation:

(a) Assets= -Liabilities Capital
(b) Liabilities= Capital+ Asset
(c) Capital Assets+ Liabilities
(d) Liabilities= Assets- Capital

Answer : (d) Liabilities= Assets- Capital

9. The amount withdrawn by the proprietor for his personal use wil………..the cash capital.

(a) Increase
(b) Decrease
(c) No change
(d) None of the above

Answer : (b) Decrease

10. A business has assets of 36,650 and liabilities of 10,000. What is the amount of capital?

(a) ₹ 45,650
(b) 26,650
(c) 46,650
(d) None of these

Answer : (b) 26,650

True/False

1. An increase in Asset may lead to an increase in capital.

Answer: True

2. An increase in Asset may lead to an increase in Liability.

Answer: True

3. Asset increases by selling goods for cash.

Answer: False

4. Withdrawal of cash for personal use decreases capital.

Answer: True

Assertion Reason Based Questions

Choose the correct option :

A. Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of the Assertion (A).
B. Both Assertion (A) and Reason (R) are correct but Reason (R) is not the correct explanation of Assertion (A).
C. Only Assertion (A) is correct.
D. Only Reason (R) is correct.

1. Assertion: A document which supports the transaction for recording is source document.
Reason: These documentary evidence are Cash Memo, invoice or bill.

Answer: (A)

2. Assertion: When funds are added to the business by the proprietor the capital is increased (credited).
Reason: When business earns a profit, it is added (credited) to the capital.

Answer: (A)

Statement Based Questions

Choose the correct option from the options given below:

A. Statement I is true and II is false.
B. Statement II is true and I is false.
C. Both the statements are false.
D. Both the statements are true.

1. Statement I: Interest on drawings is a revenue earned by the business. So it is added to the profits earned.
Statement II: A part of capital is withdrawn i.e. drawings are made the capital is decreased (debited).

Answer: (D)

2. Statement I: Debit note indicates that supplier’s account is being debited.
Statement II: Debit note is a document issued by seller/vendor in response to debit note received from the customer.

Answer: (A)

Short Answer Type-l Questions

1. What do you mean by source documents in accountancy?

Answer : A source document is a document that supports the transaction for recording. These documents are real, meaningful, visible records certifying the actual happening of transactions of a financial nature. These documentary evidences include cash memos, invoices or bills, cash receipts, pay-in-slips, vouchers, cheques, etc.

2. Mention any two source documents.

Answer : Two source documents mentioned are:

(i) Cash Memo
(ii) Invoice or Bill

3. What is meant by an invoice?

Answer : An invoice or bill is prepared by the trader or seller when he sells goods on credit. It contains the details about the name of the party to whom goods are sold, quantity, rate, and the total amount of sales. Usually, invoices or bills are made in duplicate. The original copy of the invoice is sent to the purchaser, and the duplicate copy is retained by the seller for recording in the books of accounts and also for future references.

4. What do you mean by Cheque?

Answer : A cheque is a document in writing, which contains an order from a customer to a banker, authorizing him to pay a specified sum to the bearer or the person named in it. The bank issues a booklet containing cheque forms to its account holders. The amount to be paid is written both in words and figures, and a cheque must be dated and signed by the drawer.

5. What is a Transfer Voucher?

Answer : A Transfer Voucher is a type of voucher that serves as documentary evidence for all non-cash transactions of the business. These non-cash transactions include credit sales or purchases of goods, return of goods by customers, and return of goods to suppliers. It contains details such as the name and address of the organization, date of preparing the voucher, accounting voucher number, title of the account debited or credited, net transaction amount, narration, signature of the person preparing it, signature of the authorized signatory, and supporting voucher number.

6. Name the two types of Vouchers.

Answer : The two types of vouchers are: (i) Cash Vouchers
(ii) Non-Cash Vouchers or Transfer Vouchers

7. What is credit voucher?

Answer : A credit voucher is a document that serves as evidence of cash receipts and is prepared to record transactions involving cash receipts against the sale of goods, sale of assets, withdrawal from the bank, etc.

8. What do you mean by an accounting equation?

Answer : An accounting equation is a mathematical expression which shows that the assets of a business are always equal to the total of capital and liabilities. It reflects the fundamental equation: Assets = Liabilities + Capital.

9. Give fundamental accounting equations.

Answer : The fundamental accounting equation is:
Assets = Liabilities + Capital

This reflects that the economic resources owned by an enterprise (assets) are equal to the total of the claims of outsiders (liabilities) and the owner’s equity (capital).

10. What is a debit note?

Answer : A debit note is a document prepared by the customer in case there are certain goods that need to be returned to the vendor. It indicates that the supplier’s account is being debited and contains details about the date, amount of the transaction, and the name of the supplier whose account is debited, along with the reason for debiting the account.

Short Answer Type-Il Questions

1. What is a source document? Explain its features.

Answer : A source document is a document that supports the transaction for recording. These documents are real, meaningful, visible records certifying the actual happening of transactions of a financial nature.

The features of source documents are as follows:

It is prepared when a transaction takes place.
It is a written proof of the happening of a transaction in the business.
It shows the complete description of the transaction.
It is the basis for the preparation of vouchers.
It helps in auditing and tax assessments.

2. Write short notes on:

(a) Pay-in-slip

Answer : A Pay-in-Slip, also known as a deposit slip, is used when cash or cheques are deposited in the bank. The Pay-in-Slip form is available from a bank and consists of two parts: the main body and the counterfoil. The customer has to fill up both parts, which contain details regarding the date, amount of cash or cheque deposited, account number of the customer, and their signatures. The main body of the Pay-in-Slip is retained by the bank, and the counterfoil, duly signed and stamped by the cashier, is returned to the customer. The counterfoil is used as the source document for recording the deposits in the books of accounts.

(b) Invoice or bill

Answer : An Invoice or Bill is prepared by the trader or seller when goods are sold on credit. It contains details about the name of the party to whom goods are sold, the quantity, rate, and the total amount of sales. Usually, invoices or bills are made in duplicate. The original copy of the invoice is sent to the purchaser, and the duplicate copy is retained by the seller for recording in the books of accounts and for future references.

(c) Cheques

Answer : A Cheque is a document in writing that contains an order from a customer to a banker, authorizing the payment of a specified sum to the bearer or the person named in it. The bank issues a booklet containing cheque forms to its account holders. The amount to be paid is written both in words and figures. A cheque must be dated and signed by the drawer. The counterfoil of the cheque or notes on the cheque book containing details of the payment is used for recording in the books of accounts.

(d) Vouchers

Answer : Vouchers are documents prepared for the purpose of recording business transactions in the books of accounts. These include receipts, cash memos, salary bills, invoices, wages bills, travelling allowance bills, registration deeds, etc. On the basis of source documents, entries are first recorded on vouchers, and then on the basis of vouchers, entries are passed in the Journal or books of original entry. Vouchers are printed by all enterprises in their name. They are prepared by an accountant and countersigned by an authorized person of the enterprise. According to J.R. Batliboi, “A voucher may be defined as documentary evidence in support of an entry appearing in the books of accounts.”

3. Explain the term vouchers. Mention and explain types of vouchers in brief.

Answer : Vouchers are documents prepared for the purpose of recording business transactions in the books of accounts. These include receipts, cash memos, salary bills, invoices, wages bills, travelling allowance bills, registration deeds, etc. On the basis of source documents, entries are first recorded on vouchers and then passed into the Journal or books of original entry. Vouchers are printed by all enterprises in their name and are prepared by an accountant, countersigned by an authorised person of the enterprise. According to J.R. Batliboi, “A voucher may be defined as documentary evidence in support of an entry appearing in the books of accounts.”

The types of vouchers are as follows:

Cash Vouchers :
- These are documentary evidences of cash receipts and cash payments.
- They are further classified into:
  (i) Debit Voucher : A document that serves as proof of cash payments, such as expenses, purchase of goods, or depositing cash into the bank.
  (ii) Credit Voucher : A document that serves as proof of cash receipts, such as sale of goods, sale of assets, or withdrawal from the bank.
Non-Cash Vouchers or Transfer Vouchers :
- These are documentary evidences of all non-cash transactions of the business, such as credit sales or purchases, return of goods by customers, or return of goods to suppliers.

Long Answer Type Questions

1. What is a source document? What are its features? Enumerate various source documents.

It is prepared when a transaction takes place.
It is a written proof of the happening of a transaction in the business.
It shows the complete description of the transaction.
It is the basis for the preparation of vouchers.
It helps in auditing and tax assessments.

Some common source documents include:

Cash Memo: A document showing the amount, date, and details of cash purchases and cash sales.
Invoice or Bill: Prepared by the trader or seller when goods are sold on credit, containing details about the name of the party to whom goods are sold, quantity, rate, and the total amount of sales.
Receipt: An evidence of cash or cheque received by a trader on account of any transaction involving cash other than those concerned with cash sales or cash purchases.
Pay-in-Slip: Used when cash or cheques are deposited in the bank, consisting of two parts—main body and counterfoil.
Cheque: A document in writing containing an order from a customer to a banker authorising him to pay a specified sum to the bearer or the person named in it.
Debit Note: A document prepared by the customer when certain goods need to be returned to the vendor, indicating that the supplier’s account is being debited.
Credit Note: A document issued by the seller/vendor in response to the debit note received from the customer, showing that the latter’s account has been credited in the books.

2. Explain:

i. What is a Cash Memo?

Answer : A Cash Memo is a document showing the amount, date, and details of cash purchases and cash sales. Cash Memos are received from suppliers when cash purchases are made and issued to customers when cash sales are made.

ii. What is an Invoice or Bill?

Answer : An Invoice or Bill is prepared by the trader or seller when goods are sold on credit. It contains details about the name of the party to whom goods are sold, quantity, rate, and the total amount of sales. Usually, invoices or bills are made in duplicate, with the original copy sent to the purchaser and the duplicate retained by the seller for recording in the books of accounts and future references.

iii. What is a Cheque?

Answer : A Cheque is a document in writing, containing an order from a customer to a banker, authorizing him to pay a specified sum to the bearer or the person named in it. The cheque must be dated and signed by the drawer. The counterfoil of the cheque or notes on the cheque book containing details of the payment is used for recording in the books of accounts.

iv. What is a Pay-in-Slip?

Answer : A Pay-in-Slip, also known as a deposit slip, is used when cash or cheques are deposited in the bank. It consists of two parts: the main body and the counterfoil. Both parts contain details regarding the date, amount of cash or cheque deposited, account number of the customer, and their signatures. The main body is retained by the bank, while the counterfoil, duly signed and stamped by the cashier, is returned to the customer and serves as the source document for recording deposits in the books of accounts.

v. What is a Receipt?

Answer : A Receipt is an evidence of cash or cheque received by a trader on account of any transaction involving cash other than those concerned with cash sales or cash purchases. Receipts are usually prepared in duplicate, with the original copy given to the person making the payment and the duplicate retained by the receiver of cash for future reference and record in the books of accounts. Receipts are serially numbered and contain the date, amount, name of the person, and nature of the payment.

vi. What is a Voucher?

Answer : A Voucher is a document prepared for the purpose of recording business transactions in the books of accounts. It includes receipts, cash memos, salary bills, invoices, wages bills, travelling allowance bills, registration deeds, etc. Vouchers are prepared by analyzing source documents, and entries are first recorded on vouchers before being passed into the Journal or books of original entry. Vouchers are printed by enterprises in their name, prepared by an accountant, and countersigned by an authorized person.

3. What do you mean by Transfer voucher? Why are they prepared? Give the contents of this voucher?

Answer : A Transfer voucher, also referred to as a Non-Cash Voucher, is a documentary evidence of all non-cash transactions of a business. These non-cash transactions include credit sales or purchases of goods, return of goods by customers, return of goods to suppliers, etc. Transfer vouchers are prepared to record such transactions that do not involve cash but still need to be documented for proper accounting.

The contents of a Transfer Voucher or Non-Cash Voucher are as follows:

(i) Name and Address of the Organisation.
(ii) Date of Preparing Voucher.
(iii) Accounting Voucher Number.
(iv) Title of the Account Debited/Credited.
(v) Net Transaction Amount.
(vi) Narration, i.e., a brief description of the transaction.
(vii) Signature of the Person Preparing it.
(viii) Signature of the Authorised Signatory.
(ix) Supporting Voucher Number.

Practical Problems

Questions

1. Suppose Grayson starts a new business and the following successive transactions take place :

Transaction 1 : Grayson started business with ₹ 80,000 as capital.
Transaction 2 : Grayson purchased furniture for Cash ₹ 7,000.
Transaction 3 : Grayson purchased goods for Cash ₹ 30,000.
Transaction 4 : Grayson purchased goods on credit for ₹ 12,000 .
Transaction 5 : Goods costing ₹ 10,000 sold on credit for ₹ 12,000 .
Transaction 6 : Paid ₹ 2,000 for rent.

Solution: Check below

2. Show the Accounting Equation on the basis of the following transactions and prepare a Balance Sheet on the basis of the last new equation :

1.	Mani started business with cash	60,000
2.	Purchased goods for cash	15,000
3.	Purchased goods on credit	10,000
4.	Purchased furniture for cash	5,000
5.	Paid rent	1,000
6.	Received Commission	600
7.	Withdrew cash for private use	3,500
8.	Sold goods on credit (cost price ₹ 20,000)	30,000
9.	Paid to creditors	7,000

Solution: Check below

3. Prepare ‘Accounting Equation’ from the following :

(a) Started business with cash ₹ 1,50,000.
(b) Purchased goods for cash ₹ 10,000 and on credit ₹ 25,000.
(c) Sold goods for cash costing ₹ 15,000 and on credit costing ₹ 20,000 both at a profit of 20%.

Solution: Check below

4. Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation :

(a) Started business with cash ….. 1,00,000
(b) Rent received ….. 12,000
(c) Invested in shares ….. 58,000
(d) Received dividend ….. 8,000
(e) Purchased goods on credit from Aua ….. 22,000
(f) Paid cash for household expenses ….. 5,000
(g) Sold goods for cash (costing ₹ 6,000) ….. 10,000
(h) Cash paid to Aua ….. 20,000
(i) Deposited into bank ….. 10,000

Solution: Check below

5. Transactions of M/s James Traders are given below :

Show the effects on Assets, Liabilities and Capital with the help of accounting equation.

(a) Business started with cash ….. 1,30,000
(b) Purchased goods for cash ….. 55,000
(c) Purchased furniture from Andrew Furniture ….. 20,000
(d) Sold goods to Ethan Traders (Costing ₹ 8,000 vide bill no. 5,674) ….. 10,000
(e) Paid cartage ….. 200
(f) Cash Paid to Andrew Furniture in full settlement ….. 19,800
(g) Cash sales (costing ₹ 7,000) ….. 10,000
(h) Rent received ….. 3,000
(i) Cash withdrew for personal use ….. 2,000

Solution: Check below

6. Prove that Accounting Equation is satisfied in all the following transactions of Jexon Seth :

(i) Started business with Cash ₹ 2,00,000.
(ii) Paid rent in advance ₹ 4,000.
(iii) Purchased goods for cash ₹ 60,000 and Credit ₹ 30,000.
(iv) Sold goods for Cash ₹ 90,000 costing ₹ 45,000.
(v) Paid salary in cash ₹ 4,000 and salary outstanding ₹ 2,000.
(vi) Bought motor cycle for personal use ₹ 40,000.

Solution: Check below

7. Show the effect of following transactions on the accounting equation :

(a) Daniel started business with (i) Cash 3,00,000 (ii) Goods 2,00,000 (iii) Building 1,50,000
(b) He purchased goods for cash 60,000
(c) He sold goods for cash (costing ₹ 20,000) 30,000
(d) He purchased goods from Ryan 60,000
(e) He sold goods to Jackson (costing ₹ 70,000) 80,000
(f) He paid cash to Ryan in full settlement 58,000
(g) Salary paid by him 10,000
(h) Received cash from Jackson in full settlement 79,000
(i) Rent outstanding 2,000
(j) Prepaid Insurance 1,000
(k) Commission received by him 10,000
(l) Amount withdrawn by him for personal use 10,000
(m) Depreciation charged on building 12,000
(n) Fresh capital invested 60,000
(o) Purchased goods from Aria 5,000

Solution: Check below

8. Prove that the accounting equation is satisfied in all the following transactions of Akhil :

i. Started business with Cash ₹ 60,000 and goods ₹ 30,000 .
ii. Bought goods for Cash ₹ 18,000 and on credit for ₹ 12,000.
iii. Goods Costing ₹ 27,000 sold at a profit of 33 1/3%. Half the payment received in cash.
iv. Purchased furniture for office use ₹ 5,000 and for household use of Akhil ₹ 3,000 .

Solution: Check below

9. If the Capital of a business is ₹ 2,50,000 and outside liabilities are ₹ 50,000, Calculate total assets of the business.

Solution: Check below

10. If total assets of a business are ₹ 3,00,000 and net worth (Capital) is ₹ 1,00,000, Calculate Creditors.

Solution: Check below

11. A commenced business on 1st April, 2020 with a Capital of ₹ 6,00,000. On 31st March, 2021, his assets were worth ₹ 8,20,000 and liabilities ₹ 80,000 . Find out his closing capital and profits earned during the year.

Solution: Check below

12. (a) Owen started business on 1st April, 2021 with Capital of ₹ 9,00,000 and a loan of ₹ 1,00,000 taken from Punjab National Bank. On 31st March, 2022 his assets were ₹ 18,00,000. Find out his Capital on 31st March, 2022 and profits made or losses incurred during the year 2022-23.

Solution: Check below

(b) If in the above question, the proprietor had introduced additional capital of ₹ 1,20,000 and had withdrawn ₹ 30,000 for personal purposes, find out the profit.

Solution: Check below

Solutions

1. Solution:

No.	Transactions	Assets					Liabilities		Capital
		Cash	Furniture	Stock	Debtors		Creditors		Capital
1.	Started business with cash	80,000	0	0	0	=	0	+	80,000
New Equation		80,000	0	0	0	=	0	+	80,000
2.	Purchased furniture for cash	-7,000	+7,000	0	0	=	0	+	0
New Equation		73,000	7,000	0	0	=	0	+	80,000
3.	Purchased goods for cash	-30,000	0	+30,000	0	=	0	+	0
New Equation		43,000	7,000	30,000	0	=	0	+	80,000
4.	Purchased goods on credit	0	0	+12,000	0	=	+12,000	+	0
New Equation		43,000	7,000	42,000	0	=	12,000	+	80,000
5.	Goods costing ₹ 10,000 sold on credit for ₹ 12,000	0	0	-10,000	+12,000	=	0	+	2,000
New Equation		43,000	7,000	32,000	12,000	=	12,000	+	82,000
6.	Paid rent	-2,000	0	0	0	=	0	+	-2,000
New Equation		41,000	7,000	32,000	12,000	=	12,000	+	80,000

Balance sheet of Grayson as on…

Liabilities	₹	Assets	₹
Capital	80,000	Cash in Hand	41,000
Creditors	12,000	Furniture	7,000
		Stock	32,000
		Debtors	12,000
Total	92,000	Total	92,000

2. Solution:

No.	Transactions	Assets						Liabilities	Capital
		Cash	Furniture	Stock	Debtors			Creditors	Capital
1.	Started business with cash	60,000	0	0	0	=	0	+	60,000
New Equation		60,000	0	0	0	=	0	+	60,000
2.	Purchased goods for cash	-15,000	0	+15,000	0	=	0	+	0
New Equation		45,000	0	15,000	0	=	0	+	60,000
3.	Purchased goods on credit	0	0	+10,000	0	=	+10,000	+	0
New Equation		45,000	0	25,000	0	=	10,000	+	60,000
4.	Purchased furniture for cash	-5,000	+5,000	0	0	=	0	+	0
New Equation		40,000	5,000	25,000	0	=	10,000	+	60,000
5.	Paid rent	-1,000	0	0	0	=	0	+	-1,000
New Equation		39,000	5,000	25,000	0	=	10,000	+	59,000
6.	Received commission	+600	0	0	0	=	0	+	+600
New Equation		39,600	5,000	25,000	0	=	10,000	+	59,600
7.	Withdrew cash for private use	-3,500	0	0	0	=	0	+	-3,500
New Equation		36,100	5,000	25,000	0	=	10,000	+	56,100
8.	Sold goods on credit (Cost ₹ 20,000)	0	0	-20,000	+30,000	=	0	+	+10,000
New Equation		36,100	5,000	5,000	30,000	=	10,000	+	66,100
9.	Paid to creditors	-7,000	0	0	0	=	-7,000	+	0
New Equation		29,100	5,000	5,000	30,000	=	3,000	+	66,100

BALANCE SHEET OF MANI as at…

Liabilities	₹	Assets	₹
Capital	66,100	Cash in Hand	29,100
Creditors	3,000	Furniture	5,000
		Stock	5,000
		Debtors	30,000
Total	69,100	Total	69,100

3. Solution:

No.	Transactions	Assets				Liabilities		Capital
		Cash	Stock	Debtors		Creditors		Capital
1.	Started business with cash	1,50,000	0	0	=	0	+	1,50,000
New Equation		1,50,000	0	0	=	0	+	1,50,000
2.	Purchased goods for cash	-10,000	+10,000	0	=	0	+	0
	Purchased goods on credit	0	+25,000	0	=	+25,000	+	0
New Equation		1,40,000	35,000	0	=	25,000	+	1,50,000
3.	Sold goods for cash (Cost ₹ 15,000, Profit 20%)	+18,000	-15,000	0	=	0	+	3,000
	Sold goods on credit (Cost ₹ 20,000, Profit 20%)	0	-20,000	+24,000	=	0	+	4,000
New Equation		1,58,000	0	24,000	=	25,000	+	1,57,000

BALANCE SHEET as at…

Liabilities	₹	Assets	₹
Capital	1,57,000	Cash in Hand	1,58,000
Creditors	25,000	Debtors	24,000
Total	1,82,000	Total	1,82,000

4. Solution:

No.	Transactions	Assets					Liabilities		Capital
		Cash	Investment	Stock	Bank	=	Creditors	+	Capital
1.	Started business with cash	1,00,000	0	0	0	=	0	+	1,00,000
New Equation		1,00,000	0	0	0	=	0	+	1,00,000
2.	Rent received	+12,000	0	0	0	=	0	+	12,000
New Equation		1,12,000	0	0	0	=	0	+	1,12,000
3.	Invested in shares	-58,000	+58,000	0	0	=	0	+	0
New Equation		54,000	58,000	0	0	=	0	+	1,12,000
4.	Received dividend	+8,000	0	0	0	=	0	+	8,000
New Equation		62,000	58,000	0	0	=	0	+	1,20,000
5.	Purchased goods on credit from Aua	0	0	+22,000	0	=	+22,000	+	0
New Equation		62,000	58,000	22,000	0	=	22,000	+	1,20,000
6.	Paid cash for household expenses	-5,000	0	0	0	=	0	+	-5,000
New Equation		57,000	58,000	22,000	0	=	22,000	+	1,15,000
7.	Sold goods for cash (costing ₹ 6,000)	+10,000	0	-6,000	0	=	0	+	4,000
New Equation		67,000	58,000	16,000	0	=	22,000	+	1,19,000
8.	Cash paid to Aua	-20,000	0	0	0	=	-20,000	+	0
New Equation		47,000	58,000	16,000	0	=	2,000	+	1,19,000
9.	Deposited into bank	-10,000	0	0	+10,000	=	0	+	0
New Equation		37,000	58,000	16,000	10,000	=	2,000	+	1,19,000

5. Solution:

No.	Transactions	Assets					Liabilities		Capital
		Cash	Furniture	Stock	Debtors		Creditors		Capital
1.	Business started with cash	1,30,000	0	0	0	=	0	+	1,30,000
New Equation		1,30,000	0	0	0	=	0	+	1,30,000
2.	Purchased goods for cash	-55,000	0	+55,000	0	=	0	+	0
New Equation		75,000	0	55,000	0	=	0	+	1,30,000
3.	Purchased furniture from Andrew Furniture	0	+20,000	0	0	=	+20,000	+	0
New Equation		75,000	20,000	55,000	0	=	20,000	+	1,30,000
4.	Sold goods to Ethan Traders (Costing ₹ 8,000 vide bill no. 5,674)	0	0	-8,000	+10,000	=	0	+	2,000
New Equation		75,000	20,000	47,000	10,000	=	20,000	+	1,32,000
5.	Paid cartage	-200	0	0	0	=	0	+	-200
New Equation		74,800	20,000	47,000	10,000	=	20,000	+	1,31,800
6.	Cash paid to Andrew Furniture in full settlement	-19,800	0	0	0	=	-20,000	+	200
New Equation		55,000	20,000	47,000	10,000	=	0	+	1,32,000
7.	Cash sales (costing ₹ 7,000)	+10,000	0	-7,000	0	=	0	+	3,000
New Equation		65,000	20,000	40,000	10,000	=	0	+	1,35,000
8.	Rent received	+3,000	0	0	0	=	0	+	3,000
New Equation		68,000	20,000	40,000	10,000	=	0	+	1,38,000
9.	Cash withdrew for personal use	-2,000	0	0	0	=	0	+	-2,000
New Equation		66,000	20,000	40,000	10,000	=	0	+	1,36,000

6. Solution:

No.	Transactions	Assets				Liabilities		Capital
		Cash	Stock	Prepaid Expenses		Creditors	Outstanding Expenses	Capital
1.	Started business with cash	2,00,000	0	0	=	0	+	2,00,000
New Equation		2,00,000	0	0	=	0	+	2,00,000
2.	Paid rent in advance	-4,000	0	+4,000	=	0	+	0
New Equation		1,96,000	0	4,000	=	0	+	2,00,000
3.	Purchased goods for cash and on credit	-60,000	+90,000	0	=	+30,000	+	0
New Equation		1,36,000	90,000	4,000	=	30,000	+	2,00,000
4.	Sold goods for cash (costing ₹ 45,000)	+90,000	-45,000	0	=	0	+	+45,000
New Equation		2,26,000	45,000	4,000	=	30,000	+	2,45,000
5.	Paid salary in cash and salary outstanding	-4,000	0	0	=	+2,000	+	-4,000
New Equation		2,22,000	45,000	4,000	=	30,000	+2,000	2,41,000
6.	Bought motor cycle for personal use	-40,000	0	0	=	0	+	-40,000
New Equation		1,82,000	45,000	4,000	=	30,000	+2,000	1,99,000

7. Solution:

No.	Transactions	Assets						Liabilities		Capital
		Cash	Building	Stock	Debtors	Prepaid Expenses		Creditors	Outstanding Expenses	Daniel’s Capital
1.	Started business with: (i) Cash 3,00,000 (ii) Goods 2,00,000 (iii) Building 1,50,000	3,00,000	1,50,000	2,00,000	0	0	=	0	0	+ 6,50,000
New Equation		3,00,000	1,50,000	2,00,000	0	0	=	0	0	+ 6,50,000
2.	Purchased goods for cash	-60,000	0	+60,000	0	0	=	0	0	+ 0
New Equation		2,40,000	1,50,000	2,60,000	0	0	=	0	0	+ 6,50,000
3.	Sold goods for cash (costing ₹ 20,000) for ₹ 30,000	+30,000	0	-20,000	0	0	=	0	0	+ 10,000
New Equation		2,70,000	1,50,000	2,40,000	0	0	=	0	0	+ 6,60,000
4.	Purchased goods from Ryan on credit	0	0	+60,000	0	0	=	+60,000	0	+ 0
New Equation		2,70,000	1,50,000	3,00,000	0	0	=	60,000	0	+ 6,60,000
5.	Sold goods to Jackson (costing ₹ 70,000) for ₹ 80,000	0	0	-70,000	+80,000	0	=	0	0	+ 10,000
New Equation		2,70,000	1,50,000	2,30,000	80,000	0	=	60,000	0	+ 6,70,000
6.	Paid cash to Ryan in full settlement	-58,000	0	0	0	0	=	-60,000	0	+ 2,000
New Equation		2,12,000	1,50,000	2,30,000	80,000	0	=	0	0	+ 6,72,000
7.	Salary paid	-10,000	0	0	0	0	=	0	0	-10,000
New Equation		2,02,000	1,50,000	2,30,000	80,000	0	=	0	0	+ 6,62,000
8.	Received cash from Jackson in full settlement	+79,000	0	0	-80,000	0	=	0	0	+ 1,000
New Equation		2,81,000	1,50,000	2,30,000	0	0	=	0	0	+ 6,63,000
9.	Rent outstanding	0	0	0	0	0	=	0	+2,000	-2,000
New Equation		2,81,000	1,50,000	2,30,000	0	0	=	0	2,000	+ 6,61,000
10.	Prepaid Insurance	-1,000	0	0	0	+1,000	=	0	0	+ 0
New Equation		2,80,000	1,50,000	2,30,000	0	1,000	=	0	2,000	+ 6,61,000
11.	Commission received	+10,000	0	0	0	0	=	0	0	+ 10,000
New Equation		2,90,000	1,50,000	2,30,000	0	1,000	=	0	2,000	+ 6,71,000
12.	Amount withdrawn for personal use	-10,000	0	0	0	0	=	0	0	-10,000
New Equation		2,80,000	1,50,000	2,30,000	0	1,000	=	0	2,000	+ 6,61,000
13.	Depreciation charged on building	0	-12,000	0	0	0	=	0	0	-12,000
New Equation		2,80,000	1,38,000	2,30,000	0	1,000	=	0	2,000	+ 6,49,000
14.	Fresh capital invested	+60,000	0	0	0	0	=	0	0	+60,000
New Equation		3,40,000	1,38,000	2,30,000	0	1,000	=	0	2,000	+ 7,09,000
15.	Purchased goods from Aria on credit	0	0	+5,000	0	0	=	+5,000	0	+ 0
Final Equation		3,40,000	1,38,000	2,35,000	0	1,000	=	5,000	2,000	+ 7,09,000

8. Solution:

No.	Transactions	Assets					Liabilities		Capital
		Cash	Stock	Debtors	Furniture		Creditors		Capital
i.	Started business with cash and goods	60,000	30,000	0	0	=	0	+	90,000
New Equation		60,000	30,000	0	0	=	0	+	90,000
ii.	Bought goods for cash and on credit	-18,000	+30,000	0	0	=	+12,000	+	0
New Equation		42,000	60,000	0	0	=	12,000	+	90,000
iii.	Goods costing ₹ 27,000 sold at a profit of 33⅓% (i.e. ₹ 9,000). Half received in cash, rest on credit	+18,000	-27,000	+18,000	0	=	0	+	9,000
New Equation		60,000	33,000	18,000	0	=	12,000	+	99,000
iv.	Purchased furniture for office use and household use (Household use deducted from capital)	-5,000	0	0	+5,000	=	0	+	-3,000
New Equation		52,000	33,000	18,000	5,000	=	12,000	+	96,000

9. Solution: Given:

Capital = ₹ 2,50,000
Liabilities = ₹ 50,000

Formula:
Total Assets = Capital + Liabilities

Calculation:
Total Assets = 2,50,000 + 50,000
Total Assets = ₹ 3,00,000

Thus, the total assets of the business are ₹ 3,00,000.

10. Solution: Given:

Total Assets = ₹ 3,00,000
Capital (Net Worth) = ₹ 1,00,000

Formula:
Liabilities (Creditors) = Total Assets – Capital

Calculation:
Creditors = 3,00,000 – 1,00,000
Creditors = ₹ 2,00,000

Thus, the amount of creditors is ₹ 2,00,000.

11. Solution: Given:

Opening Capital = ₹ 6,00,000
Total Assets on 31st March, 2021 = ₹ 8,20,000
Liabilities on 31st March, 2021 = ₹ 80,000

Formula:

Closing Capital = Total Assets – Liabilities
Profit = Closing Capital – Opening Capital

Calculation:
Closing Capital = 8,20,000 – 80,000
Closing Capital = ₹ 7,40,000

Profit = 7,40,000 – 6,00,000
Profit = ₹ 1,40,000

Thus, the closing capital is ₹ 7,40,000, and the profit earned during the year is ₹ 1,40,000.

12. (a) Solution: Given:

Opening Capital = ₹ 9,00,000
Loan from Punjab National Bank = ₹ 1,00,000
Total Assets on 31st March, 2022 = ₹ 18,00,000

Formula:

Closing Capital = Total Assets – Liabilities
Profit/Loss = Closing Capital – Opening Capital

Calculation:

Closing Capital = 18,00,000 – 1,00,000
Closing Capital = ₹ 17,00,000

Profit = 17,00,000 – 9,00,000
Profit = ₹ 8,00,000

Thus, Owen’s closing capital is ₹ 17,00,000, and the profit earned during the year is ₹ 8,00,000.

12. (b) Solution: Given:

Solution: Given:

Additional Capital Introduced = ₹ 1,20,000
Drawings (Personal Use) = ₹ 30,000

Formula:

Profit = Closing Capital + Drawings – Additional Capital – Opening Capital

Calculation:

Profit = 17,00,000 + 30,000 – 1,20,000 – 9,00,000
Profit = ₹ 7,10,000

Thus, considering the additional capital and drawings, the profit earned is ₹ 7,10,000.

Extras

Additional questions and answers

1. Define a source document.

Answer : A source document is a document which supports the transaction for recording. These documents are real, meaningful, visible records certifying the actual happening of the transactions of financial nature.

Q. What is an invoice?

Q. Define cash memo.

Answer : A cash memo is a document showing the amount, date, and details of cash purchases and cash sales. Cash memos are received from suppliers when cash purchases are made and issued to customers when cash sales are made.

Q. What is a receipt?

Answer : A receipt is an evidence of cash or cheque received by a trader on account of any transaction involving cash other than those concerned with cash sales or cash purchases. It may be issued by a trader to a customer, by a landlord to a tenant, or by a school or college to a student.

Q. What is a pay-in-slip?

Answer : A pay-in-slip, also known as a deposit slip, is used when cash or cheques are deposited in the bank. It consists of two parts—main body and counterfoil—and contains details regarding the date, amount of cash or cheque deposited, account number of the customer, and their signatures.

Q. Define cheque?

Answer : A cheque is a document in writing, which contains an order from a customer to a banker, authorising him to pay a specified sum to the bearer or the person named in it. The bank issues a booklet containing cheque forms to its account holders. The amount to be paid is written both in words and figures. A cheque must be dated and signed by the drawer.

Q. What is a debit note?

Answer : A debit note is a document prepared by the customer in case there are certain goods that need to be returned to the vendor. It indicates that the supplier’s account is being debited. It contains the details about the date, amount of the transaction, and the name of the supplier whose account is debited, along with the reason for debiting his account.

Q. What is a credit note?

Answer : A credit note is a document issued by the seller/vendor in response to the debit note received from the customer to show that the latter’s account has been credited in the books. It contains the details about the date, amount of the transaction, and the name of the customer whose account is credited, along with the reason for crediting his account.

Q. What is meant by vouchers?

Answer : Vouchers are documents prepared for the purpose of recording business transactions in the books of accounts. These include receipts, cash memos, salary bills, invoices, wages bills, travelling allowance bills, registration deeds, etc. On the basis of source documents, entries are first recorded on vouchers and then passed into the Journal or books of original entry. Vouchers are printed by all enterprises in their name, prepared by an accountant, and countersigned by an authorised person of the enterprise.

Q. Give the accounting equation.

Answer : The accounting equation is a mathematical expression which shows that the assets of a business are always equal to the total of capital and liabilities. It reflects the fundamental equation: Assets = Liabilities + Capital.

Q. What do you understand by assets?

Answer : Assets are economic resources of an enterprise that can be expressed in monetary terms.

Q. Define liabilities.

Answer : Liabilities refer to the claims of outsiders against the business, such as creditors for goods and expenses. They are obligations or debts that an enterprise has to pay at some point in time.

Q. What is owner’s equity?

Answer : Owner’s equity refers to the claim of the owner against the assets of the business, which includes the capital introduced by the proprietor and any profits earned or losses incurred during the business operations.

Q. What is owner’s equity?

Q. Define accrued interest.

Answer : Accrued interest refers to the interest that has been earned but not yet received.

Q. What is prepaid expense?

Answer : Prepaid expense refers to an expense that has been paid in advance but is yet to be consumed or utilized.

Q. Explain accrued income briefly.

Answer : Accrued income is the income that has been earned but not yet received in cash.

Q. Explain the origin of transactions.

Answer : Every business enterprise performs various financial transactions such as purchase and sale of goods, services and assets; receipt and payment of cash, etc. These transactions are not recorded in the books of accounts until it is supported by a documentary evidence. The source documents prove the origin of the transaction because they are primary records about the details of business transactions. These documents indicate the nature, date, amount and parties involved in the business transactions.

Q. Mention any two features of source documents.

Answer : (i) It is prepared when a transaction takes place. (ii) It is a written proof of happening of transaction in the business.

Q. Describe the contents of a cash memo.

Answer : A cash memo is a document showing the amount, date and details of cash purchases and cash sales. Cash memos are received from suppliers when cash purchases are made and issued to customers when cash sales are made. It includes quantity, description, rate, total amount, trade discount (if any), VAT (if applicable), and the name and address of the parties involved.

Q. What information does an invoice contain?

Answer : An invoice or bill contains the details about the name of the party to whom goods are sold, quantity, rate, and the total amount of sales. Usually, invoices or bills are made in duplicate, with the original copy sent to the purchaser and the duplicate copy retained by the seller for recording in the books of accounts and future references.

Q. List any two contents of a receipt.

Answer : (i) Date, amount, and nature of payment. (ii) Name of the person making the payment.

Q. Explain briefly the purpose of a pay-in-slip.

Answer : The purpose of a pay-in-slip is to deposit cash or cheques into the bank. It is used when cash or cheques are deposited in the bank and consists of two parts: the main body and the counterfoil. The customer fills both parts, which contain details regarding the date, amount of cash or cheque deposited, account number, and signatures. The main body is retained by the bank, while the counterfoil, duly signed and stamped by the cashier, is returned to the customer for future reference and record in the books of accounts.

Q. Mention two key details found on a cheque.

Answer : Two key details found on a cheque are: (i) The amount to be paid, written both in words and figures. (ii) The date and signature of the drawer.

Q. Explain the purpose of preparing a debit note.

Answer : The purpose of preparing a debit note is to document goods that need to be returned to the vendor. A debit note indicates that the supplier’s account is being debited and contains details about the date, amount of the transaction, and the name of the supplier whose account is debited, along with the reason for debiting the account.

Q. State the purpose of a credit note.

Answer : The purpose of a credit note is to document that the customer’s account has been credited in response to a debit note received from them. It contains details about the date, amount of the transaction, and the name of the customer whose account is credited, along with the reason for crediting the account.

Q. Mention two essential features of a voucher.

Answer : Two essential features of a voucher are:

It is a written document.
It is prepared by analyzing the source documents.

Q. Briefly describe debit and credit vouchers.

Answer :

Debit Voucher: These vouchers are the documentary proof of the cash payments. They are prepared to record transactions involving cash payments made against expenses, purchase of goods, depositing cash into the bank, etc.
Credit Voucher: These vouchers are the documentary evidence of the cash receipts. They are prepared to record transactions involving cash receipts against the sale of goods, sale of assets, withdrawal from the bank, etc.

Q. What is the dual aspect concept in accounting?

Answer : The dual aspect concept in accounting is the basis of the accounting equation. It is a mathematical expression that shows that the assets of a business are always equal to the total of capital and liabilities. Under this concept, every transaction has two aspects—debit and credit—and it holds that for every debit, there is a credit of an equal amount and vice versa.

Q. Describe the different types of source documents.

Answer : The different types of source documents are:

Cash Memo: A document showing the amount, date, and details of cash purchases and cash sales. Cash Memos are received from suppliers when cash purchases are made and issued to customers when cash sales are made.
Invoice or Bill: Prepared by the trader or seller when goods are sold on credit. It contains details about the name of the party to whom goods are sold, quantity, rate, and the total amount of sales.
Receipt: An evidence of cash or cheque received by a trader on account of any transaction involving cash other than those concerned with cash sales or cash purchases.
Pay-in-Slip: Used when cash or cheques are deposited in the bank. It consists of two parts—main body and counterfoil.
Cheque: A document in writing containing an order from a customer to a banker authorizing him to pay a specified sum to the bearer or the person named in it.
Debit Note: A document prepared by the customer when certain goods need to be returned to the vendor. It indicates that the supplier’s account is being debited.
Credit Note: A document issued by the seller/vendor in response to the debit note received from the customer to show that the latter’s account has been credited in the books.

Q. State the contents of a debit voucher.

Answer : The format and contents of a debit voucher include:

(1) Name and Address of the Organisation.
(2) Date of Preparing the Voucher.
(3) Accounting Voucher Number.
(4) Title of the Account Debited.
(5) Net Transaction Amount.
(6) Narration, i.e., a brief description of the transaction.
(7) Signature of the Person Preparing it.
(8) Signature of the Authorised Signatory.
(9) Supporting Voucher Number.
(10) A Document in lieu of the Supporting Voucher.

Q. Explain the effect of introducing capital and drawings on the accounting equation.

Answer : When funds are added to the business by the proprietor, the capital is increased (credited). When a part of the capital is withdrawn, i.e., drawings are made, the capital is decreased (debited). The withdrawal of cash for personal use decreases both the cash and the capital in the accounting equation.

Q. Describe transactions that affect two items in the accounting equation.

Answer : Transactions affecting two items in the accounting equation include:

(i) Increase in Asset, Increase in Liability: For example, credit purchases increase asset (stock) and also increase liability (creditor). Similarly, loans from the bank increase asset (cash) and also increase liability (loan).
(ii) Decrease in Liability, Decrease in Asset: For example, payment to a creditor decreases liability (creditor) and also reduces asset (cash or bank).
(iii) Increase in Asset, Increase in Owner’s Equity: For example, the introduction of capital by the proprietor increases asset (cash or bank) and also liability (capital).
(iv) Decrease in Owner’s Capital, Decrease in Asset: For example, drawings by the proprietor decrease liability (capital) and also asset (cash or bank).
(v) Increase in Asset, Decrease in Another Asset: For example, cash purchases or receipt from debtors increase one asset (goods and cash or bank, respectively) and decrease another asset (cash or bank and debtors).
(vi) Decrease in Liability, Increase in Another Liability: For example, settlement of a creditor by issue of Bill of Exchange decreases a liability (creditor) and increases another liability (Bill of Exchange).

Q. Discuss the treatment of prepaid expenses and outstanding expenses in accounting equations.

Answer : Prepaid expenses are treated as an increase in assets because they represent payments made in advance for services or benefits yet to be received. Outstanding expenses, on the other hand, are considered an increase in liabilities since they represent expenses that have been incurred but not yet paid. Both affect the accounting equation by altering the balance between assets, liabilities, and capital.

37. Explain how accrued incomes and advance receipts affect the accounting equation.

Answer : Accrued incomes are added to assets as they represent income earned but not yet received, thereby increasing the asset side of the equation. Advance receipts, however, are recorded as a liability because they indicate cash received in advance for services or goods yet to be delivered, thus increasing the liability side of the accounting equation.

Additional MCQs

1. What is required before recording a financial transaction in the books of accounts?

A. Authorisation form
B. Documentary evidence
C. Auditor’s approval
D. Manager’s approval

Answer: B. Documentary evidence

Q. Which document shows details of cash purchases and sales?

A. Invoice
B. Debit note
C. Cash memo
D. Credit note

Answer: C. Cash memo

Q. An invoice or bill is prepared when goods are sold on which basis?

A. Cash
B. Credit
C. Instalment
D. Deposit

Answer: B. Credit

Q. Which document is issued as proof of cash or cheque received other than cash sales?

A. Invoice
B. Cash memo
C. Receipt
D. Pay-in-slip

Answer: C. Receipt

Q. A Pay-in-slip is used to:

A. Record cash sales
B. Deposit cash or cheque
C. Withdraw cash
D. Record credit purchases

Answer: B. Deposit cash or cheque

Q. Cheques must be:

A. Typed
B. Signed by drawer
C. Unsigned
D. Digitally approved

Answer: B. Signed by the drawer

Q. Debit notes are prepared by:

A. Supplier
B. Banker
C. Customer
D. Auditor

Answer: C. Customer

Q. What document is issued by a seller to acknowledge the return of goods by a customer?

A. Debit note
B. Invoice
C. Credit note
D. Cash voucher

Answer: C. Credit note

Q. Vouchers prepared for cash receipts and payments are called:

A. Transfer vouchers
B. Debit vouchers
C. Credit vouchers
D. Cash vouchers

Answer: D. Cash vouchers

Q. Which voucher records the transaction involving payment of cash?

A. Credit voucher
B. Debit voucher
C. Transfer voucher
D. Receipt voucher

Answer: B. Debit voucher

Q. Interest earned but not received will affect which accounts in the accounting equation?

A. Decrease capital
B. Increase assets and capital
C. Increase liability
D. Decrease assets

Answer: B. Increase assets and capital

Q. Which document records sales made on credit?

A. Receipt
B. Invoice
C. Debit note
D. Pay-in-slip

Answer: B. Invoice

Q. Outstanding salaries represent:

A. Increase in capital
B. Decrease in assets
C. Increase in liabilities
D. Decrease in liabilities

Answer: C. Increase in liabilities

Q. Which equation correctly represents the accounting equation?

A. Capital = Assets + Liabilities
B. Assets = Liabilities + Capital
C. Liabilities = Assets + Capital
D. Assets = Capital – Liabilities

Answer: B. Assets = Liabilities + Capital

Q. Profit in accounting is calculated as:

A. Expenses – Revenue
B. Revenue – Expenses
C. Capital + Expenses
D. Assets – Liabilities

Answer: B. Revenue – Expenses

Q. When goods are withdrawn by the proprietor for personal use, it:

A. Increases cash
B. Decreases capital
C. Increases liability
D. Has no effect

Answer: B. Decreases capital

Q. The purchase of machinery on credit results in:

A. Increase in assets and liabilities
B. Decrease in assets
C. Increase in capital
D. Decrease in liabilities

Answer: A. Increase in assets and liabilities

Q. What happens to cash when a proprietor withdraws money for personal use?

A. Increases
B. Decreases
C. No change
D. Becomes a liability

Answer: B. Decreases

Q. If capital is ₹50,000 and liabilities ₹30,000, what are total assets?

A. ₹ 20,000
B. ₹ 80,000
C. ₹ 50,000
D. ₹ 30,000

Answer: B. ₹ 80,000

Q. Commission received in advance is treated as:

A. Asset
B. Liability
C. Income
D. Expense

Answer: B. Liability

Q. When a loan is repaid, it affects accounting equation by:

A. Decreasing asset and capital
B. Increasing assets and liabilities
C. Decreasing liabilities and assets
D. Increasing capital

Answer: C. Decreasing liabilities and assets

Q. Accrued interest is shown in accounting equation as:

A. Increase in asset and capital
B. Decrease in liability
C. Increase in liability
D. Decrease in asset

Answer: A. Increase in asset and capital

Q. The introduction of additional capital by the proprietor results in:

A. Increase in asset and capital
B. Decrease in asset
C. Increase in liabilities
D. Decrease in capital

Answer: A. Increase in asset and capital

Q. Depreciation on furniture leads to:

A. Increase in liabilities
B. Decrease in capital
C. Increase in assets
D. Decrease in creditors

Answer: B. Decrease in capital

Q. Rent paid reduces:

A. Assets and liabilities
B. Capital and assets
C. Liabilities and capital
D. Liabilities and assets

Answer: B. Capital and assets

26. Selling goods on credit will:

A. Increase assets and capital
B. Decrease creditors
C. Decrease stock
D. Decrease capital

Answer: C. Decrease stock

Ron'e Dutta

Ron'e Dutta is a journalist, teacher, aspiring novelist, and blogger who manages Online Free Notes. An avid reader of Victorian literature, his favourite book is Wuthering Heights by Emily Brontë. He dreams of travelling the world. You can connect with him on social media. He does personal writing on ronism.

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