Business Hub
 Business-Hub  Accounting Guidance   Software   Help

Accounting Effects

Illustration :


Go through the explanation to the following few transactions which have occurred towards the beginning of a newly started business.


1. He brought in a cash of 1, 00,000 as his capital contribution for the business.

Since the business has only been proposed and not yet started it has neither assets nor liabilities.


This transaction in accounting books is read and interpreted as


Started business with a capital of 1, 00,000 in cash.


Since capital in the form of cash is being brought into the business,


  • The value of capital has increased from zero to 1,00,000 and

  • The cash available with the business has also increased from zero to 1, 00,000.

Cash, since it is capable of being liquidated, is an asset.


Capital + Liabilities = Assets
1,00,000 + 0 = 1,00,000 (Cash)

The equation is satisfied.


2. He then purchased some furniture for 25,000.

Accounting interpretation of the transaction


Bought Furniture for cash 25,000.


Since Furniture is being bought by paying cash,


  • The value of Furniture has increased from zero to 25,000.

  • Furniture, since it is capable of being liquidated, is an asset.


  • The cash available with the business would reduce by 25,000 to 75,000.

This transaction does not have any effect on either capital or liabilities.


Capital + Liabilities = Assets
1,00,000 + 0 = 75,000 (Cash)
+ 25,000 (Furniture)

The equation is satisfied.


3. He then purchased some goods for cash for 25,000 from M/s Roxy Brothers.

Accounting interpretation of the transaction


Bought Goods for cash 25,000.


Since goods are bought by paying cash,


  • The value of Goods/Stock has increased from zero to 25,000 and Goods/Stock, since it is capable of being liquidated, is an asset.

  • The cash available with the business would reduce by 25,000 to 50,000.

This transaction does not have any effect on capital, liabilities and furniture.


Capital + Liabilities = Assets
1,00,000 + 0 = 50,000Cash)
+ 25,000 (Furniture)
+ 25,000 (Stock)

The equation is satisfied.


4. He then purchased some goods valued 10,000 from Mr. Shyam Rao on credit.

Accounting interpretation of the transaction


Bought Goods from Mr. Shyam Rao on credit for 10,000.


Since 10,000 worth of goods have been bought on credit,


  • The value of Goods/Stock has increased from the existing 25,000 to 35,000.

  • The liabilities of the business would increase from zero to 10,000.

Since they are bought on credit, the organisation owes this amount to the seller.


This liability is identified by the name of the vendor who gave the goods on credit i.e. Mr. Shyam Rao and he is a creditor for the business.


This transaction does not have any effect on capital, furniture or cash.


Capital + Liabilities = Assets
1,00,000 + 10,000 (Mr. Shyam Rao) = 50,000Cash)
+ 25,000 (Furniture)
+ 35,000 (Stock)

The equation is satisfied.


5. He then sold some goods for 20,000 on cash basis to Mr. Peter.

Accounting interpretation of the transaction


Sold Goods for cash 20,000.


Since 20,000 worth of goods are sold for cash,


  • The value of Goods/Stock has decreased from 35,000 to 15,000.

  • The cash available with the business would increase from 50,000 to 70,000.

This transaction does not have any effect on capital, furniture and liabilities i.e. Mr. Shyam Rao.


Capital + Liabilities = Assets
1,00,000 + 10,000 (Mr. Shyam Rao) = 70,000Cash)
+ 25,000 (Furniture)
+ 15,000 (Stock)

The equation is satisfied.



Balance-biz

Balancebiz Exams / Terms & Privacy Policy / Our Mission

Copyright © 2019. All rights reserved | Design by Elinje Technosoft Pvt Ltd and Digital Marketing