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Accounting Equation | Increase in Assets and Capitals both and Increase in Assets and Liability both

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  • Last Updated : 24 Jun, 2022

Accounting equation is based on the principle of dual aspect concept of accountancy because it holds true to the change that occurs due to any transaction taking place. A transaction can affect both sides of the equation by the same amount or any one side of the equation only, by both increasing or decreasing it by an equal amount. 

1. Increase in Assets and Capitals both:

The transaction that positively affects both sides, i.e., increasing the effect of the items on both sides, i.e., assets and capital. This can be understood by the following example-

(A) Introduction of Capital by the Owner: This will increase the asset side of the balance sheet by increasing cash or bank account, and will also increase capital account on the liability side of the balance sheet.

Transaction 1: Shubham started his business with capital of ₹45,000.              

Solution: 

 

Assets 

=

Liabilities 

+

Capital

 

Cash 

=

0

+

Capital

Transaction 1

45,000

=

0

+

45,000

Equation

45,000

=

0

+

45,000

(B) Accrued Income: This will be an increase in cash on the asset side, and an increase in capital on the other side.

Transaction 2: Interest on investment due ₹700.

Solution: 

 

Assets 

=

Liabilities 

+

Capital

 

Accrued Interest

=

0

+

Capital

Transaction 2

700

=

0

+

700

Equation

700

=

0

+

700

(C) Rent Received: This will be an increase in cash on the asset side and an increase capital on the other side.

Transaction 3: Received rent ₹450.

Solution:

 

Assets 

=

Liabilities

+

Capital

 

Cash

=

0

+

Capital

Transaction 3

450

=

0

+

450

Equation

450

=

0

+

450

 2. Increase in Assets and Liability both:

The transactions that positively affect both sides, i.e., increasingly affecting the items on the assets side and the items on the liability side. 

(A) Purchasing Goods on Credit: This will be an increase in stock on the asset side and an increase in creditors on the liability side.

Transaction 1: Goods purchased worth ₹11,000 on credit.

Solution:

 

Assets

=

Liabilities

+

Capital

 

Stock

=

Creditors

+

0

Transaction 1

11,000

=

11,000

+

0

Equation

11,000

=

11,000

+

0

(B) Income Received in Advance: There will be an increase in the asset (cash), and an increase in the liability.

Transaction 2: Commission received in advance ₹500.

Solution:

 

Assets

=

Liabilities

+

Capital

 

Cash

=

Unearned Commission

+

0

Transaction 2

500

=

500

+

0

Equation

500

=

500

+

0

(C) Bank Loan: Increase in cash (asset) and increase in loan(liability).

Transaction 3: Took a loan from Bank of ₹32,000.

Solution:

 

Assets

=

Liabilities

+

Capital

 

Bank 

=

Bank loan

+

0

Transaction 3

32,000

=

32,000

+

0

Equation

32,000

=

32,000

+

0

Illustration: Ayesha started a cosmetic shop having the following transactions:

1. She commenced her business with the capital of ₹1,20,000.

2. Purchased good on credit from Ashish worth ₹72,000.

3. Paid rent ₹2,600.

4. Purchased furniture worth ₹17,000 for cash.

5. Received interest 8% on an investment of ₹50,000.

6. Paid cash to a creditor of ₹23,000.

7. Salary paid to his staff ₹1,500.

8. Purchased goods on cash for ₹37,000.

9. Cash withdrawn for personal use ₹7,500.

10. Sold goods for on credit for ₹40,000.

Solution:

 


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