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Question

Use accounting equation to show the effect of the following transactions of M/s Royal Traders:

Rs

(a)

Started business with cash

1,20,000

(b)

Purchased goods for cash

10,000

(c)

Rent received

5,000

(d)

Salary outstanding

2,000

(e)

Prepaid Insurance

1,000

(f)

Received interest

700

(g)

Sold goods for cash (costing Rs 5,000)

7,000

(h)

Goods destroyed by fire

500

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Solution

S.No.

Explanation

Assets

=

Liabilities

+

Capital

Cash

+

Stock

+

Prepaid Expenses

Outstanding Expenses

(a)

Increase in cash

1,20,000

Increase in capital

1,20,000

1,20,000

=

NIL

+

1,20,000

(b)

Increase in stock

10,000

Increase in cash

(10,000)

=

1,10,000

+

10,000

=

NIL

+

1,20,000

(c)

Increase in cash

5,000

Increase in capital (Profit)

5,000

1,15,000

+

10,000

=

NIL

+

1,25,000

(d)

Increase in outstanding expenses

=

2,000

Decrease in capital (Expense)

(2,000)

1,15,000

+

10,000

=

2,000

+

1,23,000

(e)

Increase in prepaid expenses

1,000

Decrease in cash

(1,000)

1,14,000

+

10,000

+

1,000

=

2,000

+

1,23,000

(f)

Increase in cash

700

Increase in capital (Profit)

700

1,14,700

+

10,000

+

1,000

=

2,000

+

1,23,700

(g)

Increase in cash

7,000

Decrease in stock

(5,000)

Increase in capital (Profit)

2,000

1,21,700

+

5,000

+

1,000

=

2,000

+

1,25,700

(h)

Decrease in stock

(500)

Decrease in capital (Loss)

=

(500)

1,21,700

+

4,500

+

1,000

=

2,000

+

1,25,200


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