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Accounting Equation | Decrease in Assets and Capital both and Decrease in Asset and Liability both

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  • Last Updated : 24 Jun, 2022

Every Accounting transaction affects at least two accounts simultaneously. These effects can be both positive and negative, depending upon the nature of the transaction. Some of the transactions that negatively affect the assets, liability, and capital are being discussed below:-

1. Decrease in Assets and Capital both:

Transactions that negatively affect both assets and capital accounts simultaneously are being exemplified below:

(A) Payment of Expenses:

Transaction 1: Paid Rent of ₹12,000.

Solution: This transaction reduces both Cash (asset) and Capital by ₹12,000.

Assets = Liabilities + Capital
Cash = 0 + Capital
Transaction 1 (12,000) = 0 + (12,000)
Equation (12,000) = 0 + (12,000)

(B) Withdrawal of cash by the Businessman (Drawings):

Transaction 2: Cash withdrawn for personal use ₹4,000.

Solution: This transaction reduces both Cash (Asset) and Capital by ₹4,000.

Assets = Liabilities + Capital
Cash = 0 + Capital
Transaction 2 (4,000) = 0 + (4,000)
Equation (4,000) = 0 + (4,000)

(C) Capital Loss:

Transaction 3: Loss of machinery worth ₹8,000 due to fire.

Solution: This transaction reduces both Machinery (Asset) and Capital by ₹8,000.

Assets = Liabilities + Capital
Machinery = 0 + Capital
Transaction 3 (8,000) = 0 + (8,000)
Equation (8,000) = 0 + (8,000)

(D) Goods sold at Loss:

Transaction 4: Sold goods for cash costing ₹10,000 at a price of ₹6,000.

Solution: This transaction will reduce Stock (Asset) by ₹10,000 and Capital by 4,000 (Loss). This will also increase cash by 6,000.

Assets = Liabilities + Capital
Cash + Stock = Creditors + Capital
Transaction 4 6,000 + (10,000) = 4,000 + 0
Equation 6,000 + (10,000) = 4,000 + 0

2. Decrease in Asset and Liability both:

Transactions that negatively affect both assets and liability accounts simultaneously are being exemplified below:

(A) Payment made to creditor:

Transaction 1: Paid ₹16,000 to creditor.

Solution: This transaction reduces both Cash (Asset) and Creditor (Liability) by ₹16,000.

Assets = Liabilities + Capital
Cash = Creditors + Capital
Transaction 1 (16,000) = (16,000) + 0
Equation (16,000) = (16,000) + 0

(B) Payment of Outstanding expense:

Transaction 2: Paid outstanding Rent ₹2,000.

Solution: This transaction reduces both Cash (Asset) and Outstanding Rent (Liability) by ₹2,000.

Assets = Liabilities + Capital
Cash = Outstanding Rent + Capital
Transaction 2 (2,000) = (2,000) + 0
Equation (2,000) = (2,000) + 0

(C) Payment of Bank Loan:

Transaction 3: Paid Bank Loan of ₹1,00,000.

Solution: This transaction reduces both Bank Balance (Asset) and Bank Loan (Liability) by ₹1,00,000.

Assets = Liabilities + Capital
Cash = Bank Loan + Capital
Transaction 3 (1,00,000) = (1,00,000) + 0
Equation (1,00,000) = (1,00,000) + 0

(D) Using tangible assets to pay off the Creditors:

Transaction 4: Paid debts of ₹80,000 by giving machinery worth ₹80,000.

Solution: This transaction reduces both Machinery (Asset) and Creditors (Liability) by ₹80,000.

Assets = Liabilities + Capital
Machinery = Creditors + Capital
Transaction 4 (80,000) = (80,000) + 0
Equation (80,000) = (80,000) + 0

Sample Question:

Prepare ‘ Accounting Equation’ from the following:

  1. Started a business with cash ₹12,00,000 and machinery 20,000.
  2. A loan is taken from Bank ₹1,00,000.
  3. Paid Rent ₹12,000.
  4. Drawings ₹4,000.
  5. Loss of Machinery by fire ₹8,000.
  6. Purchase goods from Ram ₹16,000.
  7. Sold goods for cash costing ₹10,000 at the price of ₹6,000.
  8. Paid cash to Ram.
  9. Paid outstanding Rent of ₹2,000.
  10. Repaid the Bank Loan.

Solution:

 


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