Question

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

(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 ₹ 5,000)	₹ 7,000
(h)	Goods destroyed by fire	₹ 500

Answer 1

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 (Expenses)									(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)						(500)
		1,21,700	+	4500		1000		2000		1,25,200