What are the effects of the following transactions on the accounting equation (Assets = Liabilities + Capital)? a) We pay a Creditor #80,000 by Cheque. b) Bought fixtures #75,008 b... What are the effects of the following transactions on the accounting equation (Assets = Liabilities + Capital)? a) We pay a Creditor #80,000 by Cheque. b) Bought fixtures #75,008 by paying in Cash c) Bought goods on Credit #60,000 d) The proprietor introduces another #1,000 Cash into the business
Understand the Problem
The question is asking us to analyze the effects of several business transactions on the accounting equation (Assets = Liabilities + Capital). For each transaction, we need to determine how it impacts the assets, liabilities, and capital of the business. Here's a breakdown of the transactions:
- Transaction a: Paying a creditor by cheque.
- Transaction b: Buying fixtures for cash.
- Transaction c: Buying goods on credit.
- Transaction d: The proprietor introduces cash into the business.
Answer
a) Assets -80,000, Liabilities -80,000; b) Assets +75,008 and -75,008; c) Assets +60,000, Liabilities +60,000; d) Assets +1,000, Capital +1,000.
Here's how the transactions affect the accounting equation:
a) Assets decrease by 80,000 (cheque payment), and Liabilities decrease by 80,000 (creditor payment). b) Assets increase by 75,008 (fixtures) and decrease by 75,008 (cash payment). c) Assets increase by 60,000 (goods), and Liabilities increase by 60,000 (on credit). d) Assets increase by 1,000 (cash), and Capital increases by 1,000 (proprietor's contribution).
Answer for screen readers
Here's how the transactions affect the accounting equation:
a) Assets decrease by 80,000 (cheque payment), and Liabilities decrease by 80,000 (creditor payment). b) Assets increase by 75,008 (fixtures) and decrease by 75,008 (cash payment). c) Assets increase by 60,000 (goods), and Liabilities increase by 60,000 (on credit). d) Assets increase by 1,000 (cash), and Capital increases by 1,000 (proprietor's contribution).
More Information
The accounting equation (Assets = Liabilities + Capital) is the foundation of double-entry bookkeeping. Each transaction affects at least two accounts to keep the equation balanced.
Tips
A common mistake is not recognizing the dual effect of each transaction. For example, when paying a creditor, both assets (cash/cheque) and liabilities decrease.
Sources
- Show the effect of the following transactions on Assets, Liabilities ... - byjus.com
- Accounting Equation: The Complete Guide - Artsyl - artsyltech.com
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