Fundamentals of Accounting I Unit 3

Unit 3 Recording of Transactions

Structure:
3.1 Introduction
Objectives
3.2 Meaning of Assets, Liabilities, Equity
3.3 Accounting Equation and Effects of Financial Transaction on
Accounting Equation
3.4 Classification of Accounts under Modern Approach Method
3.5 Double Entry System and Rules of Debit and Credit Entries
3.6 Summary
3.7 Glossary
3.8 Terminal Questions
3.9 Answers

3.1 Introduction
In the previous unit, you learnt the basic accounting concepts and
conventions. A concept refers to assumptions or conditions. Accounting
conventions are customs or traditions and accounting principles refers to a
law the method or a rule of conduct. Management of the firm has certain
privileges to choose the accounting methods based on the situation which
eventually is termed as accounting policy. Accounting standards acts as a
guideline and provides uniform techniques of accounting. International
Financial Reporting Standards (IFRS) are standards, interpretations and
framework for the preparation and presentation of financial statements.
In this unit, you will be acquainted with the key aspects of accounting like
accounting equation, double entry system, journal and rules of debit and
credit entries. You will also learn about the classification of accounts under
traditional and modern methods. The preparation of ledger is based upon
this unit.
Objectives:
After studying this unit, you should be able to:
• explain the meaning of assets, liabilities and equity.
• describe the accounting equation and effects of financial transaction on
accounting equation
• state the classification of accounts under modern approach

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• explain double entry system and the rules of debit and credit entries
3.2 Meaning of Assets, Liabilities and Capital
A number of basic terms are used in accounting. So, it is necessary to know
the meanings of those basic terms. The important accounting terms used for
accounting equation are:
Assets:
According to Finney and Miller, "Assets are future economic benefits, the
rights which are owned or controlled by an organization or individuals".
To qualify as an asset the following factors must be present:
1) The asset must provide probable future economic benefit that enables it
to provide future net cash flows
2) The entity is able to receive the benefit and restrict other entities’ access
to that benefit.
3) The event that provides the entity with the right to the benefit has
occurred.
4) The asset must be capable of being measured reliably.
The International Accounting Standards Board (IASB) framework states that
reliable measurement means that the number must be free from material
error and bias and can be depended upon by users to represent faithfully.
Assets include:
a) Physical or real properties or things called tangible assets like lands,
building, plant and machinery, motor vehicles, furniture, stock of goods,
cash, etc., owned by a business.
b) Rights in certain things or certain rights having money value called
intangible assets, such as goodwill, patent rights, trademarks and
copyrights possessed by a business.
c) Debts or amounts due to a business from others, such as sundry
debtors, bills receivable, accrued incomes, etc.
Assets are classified based on the purpose for which an asset is held in the
hands of the user. Assets may be fixed, current, liquid or fictitious.
1) Fixed assets are those which are held for use in the production or
supply of goods and services and not for resale in the normal course of
business. Eg. Land, Plant and Machinery are fixed assets. The
exception to it is, for a land developer, land is considered as current

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asset because he is involved in buying and selling of land.

2) Current assets are those which are held or receivable within a year or
within the operating cycle of the business. They are intended to be
converted into cash within a short period of time. Ex: Stock in trade,
debtors, bills receivable, cash at bank etc.
3) Liquid assets are those which can be easily converted into cash and for
instance, cash in hand, cash at bank, marketable investments etc.
4) Fictitious assets are in the form of such expenses which could not be
written off during the period of their incidence. For example, promotional
expenses of a company which could not be treated as expenditure in the
year of incidence are shown as fictitious assets.
Liabilities:
Liabilities are probable future sacrifices of economic benefits arising from
present obligations of a particular entity to transfer assets or provide
services to other entities in the future as a result of past transactions or
events.
To qualify as a liability the following factors must be present:
1) A liability requires that the entity settles a present obligation by the
probable future transfer of an asset on demand when a specified event
occurs or at a particular date.
2) The obligation cannot be avoided
3) The event that obligates the entity has occurred.
Liabilities include all amounts owed by the business concern to outsiders
either for loans borrowed or for assets purchased on credit or for goods
purchased on credit or services received on credit. Examples of liabilities
are loans borrowed, deposits accepted, bank loan, bank overdraft, sundry
creditors, bill payable, outstanding expenses, pre-received incomes, etc.
Current liability is that obligation which has to be satisfied within a year. For
example, payment to be made to sundry creditors for the goods supplied by
them on credit; bills payable accepted by the businessman; overdraft raised
by the businessman in a bank etc.
Equity:
Owner’s Equity or Capital is the residual interest in the assets that remains
after deducting its liabilities. In a business enterprise the equity is the
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ownership interest. Equity arises from the ownership relation and is the
basis for distribution of earnings to the owners. Distribution of firm’s assets
to owners is voluntary. Equity is increased by owner’s investment as well as
profits earned and are reduced by distribution of profits in the form of
dividends.
For example, if on a given date the total assets of a business are Rs.60,000
and the total liabilities of the business are Rs.20,000, the excess of the total
assets over the total liabilities of the business, viz., (60,000 - 20,000)
Rs. 40,000 will be the owner's equity.
Liabilities 20,000 Assets 60,000
Owner’s Equity 40,000
Total 60,000 Total 60,000

Self Assessment Questions

Fill in the blanks with suitable words
1. Assets include ______________, _____________ and ___________.
2. __________ is the residual interest in the assets after deducting
liabilities.
3. The liabilities of a firm are Rs.60,000 and the capital is Rs.50,000. The
total assets are:
(a) 1,10,000 (b) 60,000 (c) 10,000 (d) 50,000

3.3 Accounting Equation and Effects of Financial Transaction on

Accounting Equation
A business concern requires resources (i.e., assets) for carrying on the
business. These resources are acquired through the finances or funds
provided by two sources, viz., owners (i.e., owners' capital) and creditors
(i.e., liabilities). So, the accounting equation may be stated as a statement of
equality between the resources (i.e., assets) and the sources of finance
(i.e., owners' capital and liabilities). In short, the accounting equation is:
Resources =Sources of finance.
The accounting equation asset = liabilities + capital, given above, can also
be expressed in two other ways. They are:

Assets – Liabilities = Capital

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Assets – Capital = Liabilities

The accounting equation, viz., assets = liabilities + proprietor's capital, can
be explained with a few examples.
• Ascertain the variables (Assets, Liabilities or capital) of an equation
affected by the transaction.
• Find out the effect (in terms of increase or decrease) of a transaction on
the variables of the equation
• Show the effect on the appropriate side of an equation.
Illustration 1
Transaction 1: Started business with Rs.1, 00,000.
Variables affected Asset and capital
Effect of the transaction Increase in asset and capital
Accounting Equation Asset = Liabilities + Capital
1,00,000 = 0 + 1,00,000

Transaction 2: Purchased Goods for cash Rs.20,000

Variables affected Asset
Effect of the transaction Increase in asset (Stock) and decrease in
another asset (cash)
Accounting Equation Asset = Liabilities + Capital
– 20,000 + 20,000 = 0 + 0

Transaction 3: Sold goods costing Rs.10,000 for cash Rs.12,000.

Variables affected Asset and capital
Effect of the transaction Increase in asset (Cash) and decrease in
another asset (Stock) and increase in capital
(profit)
Accounting Equation Asset = Liabilities + Capital
– Stock + Cash
– 10,000 +12,000 = 0 + 2,000

Self Assessment Questions

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4. The resources (i.e., the assets) are acquired through the finances or
funds provided by two sources, viz., owners (i.e., owners' capital) and
________ (i.e., liabilities).
5. Resources = _________________.
6. Fill the columns marked(?) with suitable numbers using accounting
equation.

Case Assets Liabilities Equity Total

1 50000 0 ? ?
2 ? 5000 ? 55000
3 ? 10000 50000 ?
4 100000 40000 ?

7. Find the value of the following:

a) If the total assets are Rs. 87,000 and the liabilities are Rs. 47,000,
find out the amount of capital.
b) If the capital of proprietor is Rs.4,00,000 and the total assets are
Rs.6,00,000, what is the amount of liabilities to outsiders?
c) If creditors are Rs. 56,000, bank overdraft is Rs.1,00,000 and
outstanding expenses are Rs.8,000, what is the total amount of
assets?
d) Fixed assets are Rs.70,000 and current assets are Rs.1,00,000
and the creditors are Rs.30,000. What is capital?

Activity 1:
Assume you have opened a mobile shop with an investment of
Rs. 3 lakhs. You sell mobile phones and currencies of Airtel,
Vodaphone and BSNL. Create 5 transactions and give the accounting
equations for them.

3.4 Classification of Accounts under Modern Approach Method

In traditional approach, accounts were classified into personal account, real
account and nominal account. Personal accounts were further classified into
natural, artificial and representative personal accounts. Real account
catered to intangible and tangible assets while nominal accounts pertain to
income, expenses, and loss and gain items.

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In modern approach, accounts are classified into 5 types namely asset a/c,
liability a/c, capital a/c, income a/c and expenses a/c. We have adopted
modern approach to accounting in explaining the concept and in solving the
problems. Let us now learn the classification of accounts under modern
approach.
Table 3.1: Classification of Accounts under Modern Approach

Types of
Meaning Examples
Accounts
Asset Deals with tangible and Land a/c, Building a/c, Plant &
account intangible real assets. Machinery a/c, Cash a/c, Good will
a/c, Trademark a/c, Patents a/c,
Investments a/c.
Liabilities Deals with the financial Long term loans, Debentures, Bank
account obligations of the firm on loans, Trade creditors, Outstanding
outsiders. expenses.
Capital Deals with accounts of the Capital a/c, Drawings a/c.
account owners of the company
Revenue Deals with amount charged Sales a/c, Royalty received a/c,
account for goods sold or service interest received a/c, dividend
rendered, and other received a/c.
incomes.
Expenses Deals with expenses Purchases a/c, Discount allowed
account incurred in the process of a/c, Interest paid a/c, Loss by
earning revenue fire a/c.

Illustration 2:
List of examples of accounts and the category of accounts :
1. Capital (money brought in to the business) – capital a/c
2. Land – asset a/c
3. Patents (intangible asset) – asset a/c
4. Creditors (who owe to the firm) – liability a/c
5. Drawings (money withdrawn by the proprietor) – capital a/c
6. Cash (cash balance with the firm) – asset a/c
7. Sales (revenue earned by selling goods/services) – Revenue a/c
8. Purchases – (goods purchased for manufacturing/reselling) –
Expenses a/c
9. Machinery – asset a/c
10. Discount allowed – expenses a/c

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11. Investments – asset a/c

12. Interest paid, salaries paid – expenses a/c
13. Outstanding expenses (expenses incurred but not paid) – liability a/c
14. Prepaid expenses (expenses paid in advance) – asset a/c
15. Outstanding income (income accrued but not received) – asset a/c
Self Assessment Questions
8. Classify the following accounts -
a) Insurance premium paid a/c
b) Prepaid rent a/c
c) Furniture and Fixtures a/c
d) Bank overdraft a/c
e) Capital a/c
f) Sales promotion expenses a/c
g) Discount received a/c
h) Trade creditors a/c
i) Goodwill a/c
9. Fill in the blanks:
a) ______________ deals with the financial obligations of the firm on
outsiders.
b) Patents, trademarks are _______________ assets.

3.5 Double Entry System and Rules of Debit and Credit Entries
Accounting starts with recording and ends in presenting financial information
in a manner, which facilitates 'informed judgements and decisions by users’.
The recording of transactions and events follows a definite rule. Each
transaction and/or event has two aspects or sides – debit and credit.

Every debit has an equal and opposite credit.

The T Account
The T account has three parts:
1) A title that details the name of the asset, liability or equity account
2) The left side of the account is known as debit side
3) The right side of the account is known as credit side

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Title of the Account [ eg. Cash a/c]

Left side Right side
Debit Credit
Each transaction should be recorded in such a way that it affects two
sides – debit and credit – equally. At the end of the accounting period both
the debit side and the credit side are totaled. The difference in amounts
between the total debits and the total credits in an account is the balance.
If the debit side total exceeds the credit side total the account has a debit
balance. In the example given below of cash account the debit side total is
Rs.139800 and the credit side total is Rs.83,200. The cash account has a
debit balance of Rs.56,600 (difference) and is carried to the next accounting
period. The debit balance in cash account represents the cash availability
with the firm on a particular date.
Table 3.3: Cash Account
Debit Side Credit Side
Date Particulars Ledger Amount Date Particulars Ledger Amount
Folio (Rest) Folio (Rs)
2005 2005
Jan. 1 To Balance b/d 20000 Jan 05 By Salaries 10900
Jan15 To Joseph 35 10900 Jan 25 By Furniture 123 6000
Jan 28 To Sales 18 108900 Jan 30 By purchases 19 58800
Jan 31 By Rent 298 7500
By balance c/d 56600
Total 139800 Total 139800
Feb 1 To balance b / d 56600

Similarly if the total credits exceed the total debits, the account has a credit
balance.
Standard Form of Account
In practice, accountants prepare accounts in standard format which shows
the balance after each transactions and is therefore more useful than the
‘T‘ form.
Let us explain you with an example. Mr. A started a consultancy business
with a capital of Rs. 50,000 on 1st of Jan 2010. On 3rd furniture worth

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Rs. 6,000 was purchased for the business. On 10th Jan it received
Rs.10,000 for service rendered. Rent of Rs.8,000 was paid for the premises
on 29th Jan.
Table 3.4: Standard Form of Account
Cash a/c

Date Particulars Ref Debit Credit Balance

Jan 1 Capital a/c 50,000 50,000
2010
3 Furniture a/c 6,000 44,000
10 Services 10,000 54,000
29 Rent paid 8,000 46,000

Periodically, the summarized balances from the journals are posted

(transferred) to a formal business record called the general ledger.

Table 3.5: Types of Accounts

Types of
Meaning Examples
Accounts
Asset Deals with tangible and Land a/c, Building a/c, Plant &
account intangible real assets. Machinery a/c, Cash a/c, Good will a/c,
Trademark a/c, Patents a/c,
Investments a/c
Liabilities Deals with the financial Long term loans, Debentures, Bank
account obligations of the firm loans, Trade creditors, Outstanding
on outsiders. expenses.
Capital Deals with accounts of Capital a/c, Drawings a/c
account the owners of the
company
Revenue Deals with amount Sales a/c, Royalty received a/c, interest
account charged for goods sold received a/c, dividend received a/c
or service rendered,
and other incomes.

Expenses Deals with expenses Purchases a/c, Discount allowed a/c,

account incurred in the process Interest paid a/c, Loss by fire a/c.
of earning revenue

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Table 3.6: Ground rules of Journalising entries

The format of a journal is given below :

Table 3.7: Format of Journal

Ledger Dr Cr
Date Particulars Voucher No.
Folio (Rs.) (Rs.)

Illustration 1: Analyze the following transactions:

1. On 1st Jan 2010 Mathew started a business with cash of Rs.50,000/-
The two elements present in the transaction are:
1) Cash and
2) Owner’s capital (equity)
As per the rules of journal, (a) an increase in asset is ‘debit’ and (b) increase
in equity is ‘credit’. Hence cash, an asset should be ‘debited’ and capital
(equity) is to be ‘credited’

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 1 Cash a/c Dr 50,000
2010 To Capital a/c 50,000
(Capital contributed by
Mathew)

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2. On 3rd Jan 2010, purchased furniture worth Rs. 6,000/-

This transaction has resulted in an increase in one asset (furniture) and
decrease in the other asset (cash).

The journal entry is as follows:

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 3 Furniture a/c Dr 6,000
2010 To Cash a/c 6,000
(Purchased furniture in
cash)

3. On 8th Jan 2010, purchased goods worth Rs.10,000/- from Mohan

paying Rs. 4,000/- cash and the balance after 45 days
This transaction has resulted in an increase in expenses (goods purchased),
a decrease in assets (cash balance) and an increase in liability (payment
due to Mohan).
Using the rules of journal the entry is as follows:

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 8 Goods a/c Dr 10,000
2010 To Cash a/c 4,000
To Mohan a/c 6,000
(Purchased goods
partly paid in cash)

4. On 10th Jan 2010, sold goods for cash worth Rs. 20,000/-
This transaction has resulted in an increase in asset (cash receipt) and an
increase in income (sales)

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 10 Cash a/c Dr 20,000
2010 To Sales a/c 20,000
(Sold goods for cash)

5. On 12th Jan, 2010 purchased stationery worth Rs. 3,000/-

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This transaction has resulted in increase in expenses and reduction in cash

balance.

The Journal entry is as follows :

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 12 Stationery a/c Dr 3,000
2010 To Cash a/c 3,000
(stationery purchased )

6. On 19th Jan, 2010, Received Rs. 9500/- from Mahesh a client in full
settlement of Rs.10,000.
The Journal entry is as follows :

Voucher Ledger Dr Cr
Date Particulars
No. Folio (Rs.) (Rs.)
Jan 10 Cash a/c Dr 9,500
2010 Discount a/c Dr 500
To Mahesh a/c 10,000
(cash received from
Mahesh in full
settlement of his dues )

Illustration 2: Journalize the following transactions –

i. Jan 1st – Mr. Harshit started his business with Rs. 80,000/- which he
brought as his capital in cash.
ii. Jan 10th – He purchased goods worth Rs.30,000/- in cash and
Rs. 20,000/- on credit.
iii. Jan 12th - He paid wages Rs. 500/-
iv. Jan 15th – Sold goods for Rs. 20,000/- in cash and Rs. 25,000/- on
credit
v. Jan 16th – Paid to suppliers Rs. 8,000/- for goods purchased on credit
vi. Jan 20th – Received Rs. 15,000/- from his debtors
vii. Jan 31st – Paid rent Rs. 1,000/- in cash

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Journal:
Dr Cr
Date Particulars L.F. Amount Amount
(Rs) (Rs)
Jan.1 Cash A/c ………… Dr. 80,000
To Capital A/c 80,000
(Being Business commenced with cash of
Rs.80, 000)
Jan.10 Purchase A/c ………… Dr. 50,000
To Cash A/c 30,000
To Creditors A/c 20,000
(Being goods purchased on cash &
credit)
Jan.12 Wages A/c ………… Dr. 500
To Cash A/c 500
(Being wages paid)
Jan.15 Cash A/c ……………… Dr. 20,000
Debtors A/c ………………… Dr. 25,000
To Sales A/c 45,000
(Being goods sold on cash and credit)
Jan.16 Creditors A/c…………. Dr. 8,000
To Cash A/c 8,000
(Being amount paid to suppliers of goods)
Jan.20 Cash A/c………… Dr. 15,000
15,000
To Debtors A/c
(Being cash received from debtors)

Jan.31 Rent A/c………………. Dr. 1,000

To Cash A/c 1,000
(Being the payment for rent)
1,99,500 1,99,500

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Illustration 3: Journalize the following transactions in the books of Balu.

2004 Rs.
Jan. 1 Commenced business with 25,000
Jan. 2 Goods purchased for cash 15,000
Jan. 3 Paid freight 500
Jan. 7 Goods sold to Raj Kumar on credit 5,000
Jan. 8 Paid for stationery 2,000
Jan.10 Paid for Rent 1,000
Jan.13 Cash received from Mohan Das 15,400
Allowed him discount 600
Jan.15 Paid Premium 4,000
Jan.20 Paid to postage 1,000
Jan.25 Paid for salaries 500
Jan.30 Commission received 1,000

Journal Entries
Dr Cr
Date Particulars L.F. Amount Amount
(Rs.) (Rs.)
2004 Cash A/c ………… Dr. 25,000
Jan.1 To Capital A/c 25,000
(Being Business commenced with cash
of Rs.25, 000)
Jan.2 Purchases A/c ……………… Dr. 15,000
To Cash A/c 15,000
(Being the amount of cash purchases)
Jan.3 Freight A/c …...………… Dr. 500
To Cash A/c 500
(Being the payment for freight)
Jan.7 Raj Kumar’s A/c ……… Dr. 5,000
5,000
To Sales A/c
(Being sale of goods on credit to Mr.
Raj Kumar)

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Stationery A/c ….. Dr.

Jan.8 To Cash A/c 2,000 2,000
(Being the payment of stationery)
Rent A/c. ………………… Dr.
Jan.10 1,000 1,000
To Cash A/c
(Being the amount of rent paid)
Cash A/c ……………………… Dr.
Jan.13 Discount A/c ………………… 15,400
Dr. 16,000
600
To Mohan Das’s A/c
(Being cash received from Mohan Das)
Premium A/c …………. Dr. 4,000
Jan.15 To Cash A/c 4,000
(Being the payment for premium)
Postage A/c ………… Dr. 1,000
Jan.20 To Cash A/c 1,000
(Being the payment for postage)
Salaries A/c ………………. Dr. 500
Jan.25 500
To Cash A/c
(Being the payment for salaries)
Cash A/c ……………………… Dr. 1,000
1,000
Jan.30 To Commission A/c
(Being the receipt of commission)
Total 71,000 71,000

Self Assessment Questions

Multiple choice questions :
10. Debit means:
(a) An increase in asset (b) an increase in liability
(c) A decrease in asset (d) an increase in owner’s equity
11. Credit means:
(a) An increase in asset (b) an increase in liability
(c) A decrease in liability (d) a decrease in owner’s equity
12. Journalize the below transaction:
Started business with cash Rs.2,00,000; goods Rs.1,00,000; Furniture
Rs.50,000 on 1st Jan 2010.
13. The left side of ‘T’ account is known as _______ side.

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3.6 Summary
Let us recapitulate the important concepts discussed in this unit –
➢ Assets are future economic benefits, the rights which are owned or
controlled by an organization or individuals
➢ Liabilities are probable future sacrifices of economic benefits arising
from present obligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of past
transactions or events.
➢ Capital or Owner’s Equity is the residual interest in the assets that
remains after deducting its liabilities.
➢ Accounting equation may be stated as a statement of equality between
the resources (i.e., assets) and the sources of finance (i.e., owners'
capital and liabilities).
➢ The accounts maintained by a business concern for these three classes
of transactions may be divided into two broad classes, viz. (1) Personal
Accounts and (2) Impersonal Accounts.
➢ The impersonal accounts may be sub-divided into two classes, viz,
(1) Real, Asset or Property Accounts and (2) Nominal or Fictitious
Accounts.
➢ The T’ account has three parts -A title that details the name of the asset,
liability or equity account - The left side of the account is known as debit
side The right side of the account is known as credit side
➢ Standard Format: In practice, accountants prepare accounts in standard
format which shows the balance after each transactions and is therefore
more useful than the ‘T‘ form.

3.7 Glossary
Asset: Assets are future economic benefits, the rights which are owned or
controlled by an organization or individuals.
Liability: Liabilities are probable future sacrifices of economic benefits
arising from present obligations of a particular entity to transfer assets or

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provide services to other entities in the future as a result of past transactions

or events.
Equity: It is the residual interest in the assets that remains after deducting
its liabilities.
Debit: Increase in asset and decrease in liability and equity, expenses and
losses.
Credit: Decrease in asset and increase in liability and equity, income and
gains.
‘T’ a/c: It is the type of Account which gives details the name of the asset,
liability or equity account.
Standard Format: It is a form of account that shows the balance after each
transaction. This type is more prevalent that ‘T’ account

3.8 Terminal Questions

1. Explain the terms assets, liabilities and capital.
2. Briefly explain accounting equation with an example.
3. Classify the accounts under modern approach.
4. What is double entry system?
5. Explain the rules for debit and credit.

3.9 Answers
Self Assessment Questions
1. Tangible assets, intangible assets, debts
2. Capital
3. (a ) 1,10,000
4. Creditors
5. Source of Finance
6. (1) Equity 50000; Total 50000
(2) Assets 55000; Equity 50000
(3) Assets 60000; Total 60000
(4) Equity 60000; Total 1,00,000
7. (a) 40,000 (b) 2,00,000 (c) 1,64,000 (d) 1,40,000
8. Classify the following accounts
a) Insurance premium paid a/c – expenses a/c
b) Prepaid rent a/c – asset a/c

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c) Furniture and Fixtures a/c – asset a/c

d) Bank overdraft a/c – liability a/c
e) Capital a/c – capital a/c
f) Sales promotion expenses a/c – expenses a/c
g) Discount received a/c – revenue a/c
h) Trade creditors a/c – liability a/c
i) Goodwill a/c – asset a/c
9. (a) liability
(b) intangible
10. increase in asset
11. an increase in liability
12.
Cash a/c Dr. 2,00,000
Purchases a/c Dr. 1,00,000
Furniture a/c Dr. 50,000
To Capital a/c 3,50,000
Being cash, goods and furniture brought in as capital

13. Debit

Terminal Questions
1. In accounting, assets mean resources, things or rights of value owned
by a business undertaking. For more details, refer section 3.2.
2. The accounting equation may be stated as a statement of equality
between the resources (i.e., assets) and the sources of finance
(i.e., owners' capital and liabilities). For more details, refer section 3.3.
3. The classification of accounts under modern approach – asset a/c,
liability a/c, capital a/c, revenue a/c and expenses a/c. For more details
refer section 3.4.
4. Accounting starts with recording and ends in presenting financial
information in a manner, which facilitates 'informed judgments and
decisions by users’. For more details refer section 3.5.
5. Each transaction should be recorded in such a way that it affects two
sides – debit and credit – equally. At the end of the accounting period

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Fundamentals of Accounting I Unit 3

both the debit side and credit side are totaled. For more details refer
section 3.5.

References:
• Ashok Banerjee (2009) Financial Accounting, 3rd Edition, Excel Book.
• R. Narayanaswamy (2008) Financial Accounting, A Managerial
perspective, 3rd Edition, Prentice Hall of India.
• P. C. Tulsian (2009) Financial Accounting, Fifth impression, Pearson
Education
• Barry .J. Epstein, Eva K. Jermakowicz (2009-10) IFRS, Wiley India.
• R. L. Gupta, Radhaswamy (2010). Financial Accounting, S. Chand and
Company
• Maheshwari S. N. and S. K. Maheshwari (2009), Advanced Accountancy,
Vikas Publishing House.
• M. C. Shukla (2010). Advanced Accountancy. S. Chand and Company.

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