Question

1.6 Show the dual aspect, as it affects the accounting equation (assets - liabilities = capital), of the following transactions for a particular business: • owner starts in business with capital of £8,000 in the bank • buys a computer for £4,000, paying by cheque • obtains a loan of £3,000 by cheque from a friend • buys a van for £6,000, paying by cheque 1.7* Fill in the missing figures: Assets Liabilities Capital £ £ £ 20,000 0 15,000 5,000 *** 16,400 8,850 3,850 10,250 25,380 6,950 7,910 13,250

Answer 1

1.6

A, Owner starts in business with capital of £8,OOO in the bank

    Here the 2 accounts which comes into effect are capital account and bank account.

    The journal entry to record the transaction;

Bank A/C Dr                 £8,OOO

    To Capital A/C                         £8,OOO

Here the bank account is an asset which has debit balance and capital account has the corresponding credit balance.

The effect of the transaction in the balance sheet are as follows;

Liabilities and capital	Amount	Assets	Amount
Capital	£8,OOO	Bank	£8,OOO
Total	£8,OOO	Total	£8,OOO

So the accounting equation assets — liabilities = capital will be;

                                                 ; £8,OOO -0               = £8,OOO

B, Buys a computer for £4,OOO, paying by cheque

Here the 2 accounts which comes into effect are Computer (Asset) account and bank account (Asset).

    The journal entry to record the transaction;

Computer A/C Dr                 £4,OOO

    To Bank A/C                         £4,OOO

Here both the accounts are assets having debit balance. When computer account comes into effect the balance available in the bank account reduced by corresponding amount £4,OOO. Then the balance of bank account become £4,OOO (£8,OOO -£4,OOO)

The effect of the transaction in the balance sheet are as follows;

Liabilities and capital	Amount	Assets	Amount
Capital	£8,OOO	Bank Computer	£4,OOO £4,OOO
Total	£8,OOO	Total	£8,OOO

So the accounting equation assets — liabilities = capital will be;

                                                 ; £8,OOO -0               = £8,OOO

C, Obtains a loan of £3,OOO by cheque from a friend               

Here the 2 accounts which comes into effect are loan account (Liability) and bank account (Asset).

The journal entry to record the transaction;

Bank A/C Dr                 £3,OOO

    To Loan A/C                         £3,OOO

Loan account is a liability having credit balance and when it gives an increase to the bank account. So the bank account will be debited by £3,OOO.

The transaction gives increase to the liability in the form of Loan and increases the asset in the form of bank account balance.

The effect of the transaction in the balance sheet are as follows;

Liabilities and capital	Amount	Assets	Amount
Capital Loan	£8,OOO £3,OOO	Bank Computer	£7,OOO £4,OOO
Total	£11,OOO	Total	£11,OOO

Then the accounting equation assets — liabilities = capital will be;

                                                 ; £11000 -   £3,OOO   = £8,OOO

D, Buys a van for £6,OOO, paying by cheque

Here the 2 accounts which comes into effect are Van (Asset) account and bank account (Asset).

    The journal entry to record the transaction;

Van A/C Dr                 £6,OOO

    To Bank A/C                         £6,OOO

Here both the accounts are assets having debit balance. When Van account comes into effect the balance available in the bank account reduced by corresponding amount £6,OOO. Then the balance of bank account become £1,OOO (£7,OOO -£6,OOO)

The effect of the transaction in the balance sheet are as follows;

Liabilities and capital	Amount	Assets	Amount
Capital Loan	£8,OOO £3,OOO	Bank Computer Van	£1,OOO £4,OOO £6,OOO
Total	£11,OOO	Total	£11,OOO

Then the accounting equation assets — liabilities = capital will be;

                                                 ; £11000 -   £3,OOO   = £8,OOO

1.7

Capital + Liabilities = Assets

Assets - Liabilities = Capital

Assets – Capital    = Liabilities

Assets - £	Liabilities - £	Capital - £
20000	0	20000
15000	5000	10000
16400	7550	8850
14100	3850	10250
25380	18430	6950
21160	7910	13250