Accounting Transactions Solved

TRANSACTION NO. 11
Cash withdrawn by the owner (Mr. Rizwan) Rfl. 6,000 and goods taken by him H«. 2,000
"for his personal use.
ANALYSIS:
i '
There are three changes in this business transaction:
1. Decrease in cash balance Rs. 6,000 (an asset).
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2. Decrease .in goods (purchases) by Rs. 2,000 (a decrease in expense). .
3; Decrease in capital or owner's equity or increase in Drawings of the owner by Rs. 8,000.
TRANSACTION NO. 19
Cash given away as charity Rs. 1,000 and goods given away as charity Rs. 200. ANALYSIS:
There are three changes:
1. Decrease in cash balance Rs. 1,000 (an asset),
2 . Decrease in goods (purchases) by Rs. 200 (a decrease in expense).
3. Increase in charity by Rs. 1,200 (an expense or loss).
TRANSACTION NO. 20 ,
Goods distributed as free samples for advertisement purposes Rs. 4,000. , ANALYSIS:
There- are two changes:
Decrease in goods (purchases) by Rs. 4,000 (a decrease in expanse).
Increase in advertisement expenditures by Rs. 4,000 (an expense incurred),
TRANSACTION NO. 21
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TRANSACTION NO. 22
Stationery consumed during the month worth Rs. 4,000. ANALYSIS:
Stationery worth Rs. 6,000 was purchased at the beginning of the month. During month stationery of Rs. 4,000 have been used. There are two changes:
1. Decrease in stationery Rs. 4,000 (a decrease in asset). . 2. Increase in stationery expense Rs. 4,000 (an expense). TRANSACTION NO. 23
Salaries paid for the month Rs. 8,000. ANALYSIS:
There are two changes:
Increase in salaries Rs. 8,000 (an expense incurred).
Decrease in Cash balance Rs. 8,000 (an asset).
TRANSACTION NO. 24
Rent of the building Rs. 6,000 and Electricity bill Ra. 2,000 paid by cheque. ANALYSIS:
There are three changes:
Increase in Rent Rs. 6,000 (an expense incurred).
Increase in Electric charges Rs. 2,000 (an expense incurred).
Decrease in bank balance Rs. 8,000 (an asset).
In all the above discussed transactions, it may be observed that in every busu transaction there are at least two changes and in some cases there are more than changes. All these changes are recorded in the books of accounts of the business in sepa accounts. Every change is supposed to be recorded in a separate account.
NOTE:
Discussion about account and how a change is recorded in an account is made late this chapter.

Accounting Transactions Solved

TRANSACTION NO. 11
Cash withdrawn by the owner (Mr. Rizwan) Rfl. 6,000 and goods taken by him H«. 2,000
"for his personal use.
ANALYSIS:
i '
There are three changes in this business transaction:
1. Decrease in cash balance Rs. 6,000 (an asset).
.'"••.' , i '
2. Decrease .in goods (purchases) by Rs. 2,000 (a decrease in expense). .
3; Decrease in capital or owner's equity or increase in Drawings of the owner by Rs. 8,000.
TRANSACTION NO. 19
Cash given away as charity Rs. 1,000 and goods given away as charity Rs. 200. ANALYSIS:
There are three changes:
1. Decrease in cash balance Rs. 1,000 (an asset),
2 . Decrease in goods (purchases) by Rs. 200 (a decrease in expense).
3. Increase in charity by Rs. 1,200 (an expense or loss).
TRANSACTION NO. 20 ,
Goods distributed as free samples for advertisement purposes Rs. 4,000. , ANALYSIS:
There- are two changes:
Decrease in goods (purchases) by Rs. 4,000 (a decrease in expanse).
Increase in advertisement expenditures by Rs. 4,000 (an expense incurred),
TRANSACTION NO. 21
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TRANSACTION NO. 22
Stationery consumed during the month worth Rs. 4,000. ANALYSIS:
Stationery worth Rs. 6,000 was purchased at the beginning of the month. During month stationery of Rs. 4,000 have been used. There are two changes:
1. Decrease in stationery Rs. 4,000 (a decrease in asset). . 2. Increase in stationery expense Rs. 4,000 (an expense). TRANSACTION NO. 23
Salaries paid for the month Rs. 8,000. ANALYSIS:
There are two changes:
Increase in salaries Rs. 8,000 (an expense incurred).
Decrease in Cash balance Rs. 8,000 (an asset).
TRANSACTION NO. 24
Rent of the building Rs. 6,000 and Electricity bill Ra. 2,000 paid by cheque. ANALYSIS:
There are three changes:
Increase in Rent Rs. 6,000 (an expense incurred).
Increase in Electric charges Rs. 2,000 (an expense incurred).
Decrease in bank balance Rs. 8,000 (an asset).
In all the above discussed transactions, it may be observed that in every busu transaction there are at least two changes and in some cases there are more than changes. All these changes are recorded in the books of accounts of the business in sepa accounts. Every change is supposed to be recorded in a separate account.
NOTE:
Discussion about account and how a change is recorded in an account is made late this chapter.

ANALYSIS OF BUSINESS TRANSACTIONS AND DOUBLE ENTRY SYSTEM

ANALYSIS OF BUSINESS

TRANSACTIONS AND DOUBLE ENTRY SYSTEM

vicial ition means \angein 'basis runts of writing.

We have already seen in the previous chapter that how different business transactions make change in the accounting equation (financial position) of a business concern. In accounting equation only three basic elements of accounting (the assets, liabilities and capital) have been considered. But, practically there are five basic elements of accounting, the assets, liabilities, capital, expenses and revenues. The students are required to remember an important principle "while making the analysis of business-transactions that "Every business transaction bring* about at least a double change in the financial position of a biutness concern". These two changes may take place in any one or two basic elements of accounting, there is no exception to this principle. For example, Mr. Aatf purchases machinery worth Rs. 100,000. This is a business transaction. It will bring two changes —. machinery increases by Rs. 100,000 (an asset) and cash decreases by Rs. 100,000 (an asset). So, both the changes have taken place in/assets (an element of accounting). Similarly, if he buys this machinery on credit basis from Mr. A, again it will bring two changes - machinery increase by Rs. 100,000 (an asset) and a liability increases by Rs. 100,000 (amount payable to Mr. A).

\ Now let us see how the analysis of various business transactions is made: kNSACflONN0.1 Mr. Rizwan invests Rs. 200,000 to comence his business.

ILYSIS: Two changes have taken place because of this transaction:

- 1. Cash is increased in the business by Rs. 200,000 (an asset).

i .2. Capital or Owner's equity is increased by Rs. 200,000 (an internal liability of the

business).

NSACTION NO. 2

He open current account with ABL and deposits Rs. 60,000.

LYSIS:

This transaction has brought two changes:

Decrease in Cash balance by Rs. 60,000 (an asset).

Increase in Bank balance by Rs. 60,000 (an asset).

.TRANSACTION NO. 3

He borrows Ra. 100,000 firom Mr. Saleem at 12 % interest per annum. ANALYSIS;

The two changes are:

Increase jn Cash balance by Rs. 100,000

Increase in creditor by Rs. 100,000 (a liability).

TRANSAQT|QN NQ. 4

. He purchases furniture worth Rs. 40,000 for cash.

ANALYSIS:

The two changes are:

Increase in furniture by Rs. 40,000 (an asset). .

Decrease in cash balance by Rs. 40,000 (an asset)

TRANSACTION NO. 5

He purchases goods (saleable goods) from Mr. Afzal for Rs. 50,000 and paid cash Rs. 30,000.

ANALYSIS:

. There are three changes in this business transaction:

Increase in purchases (goods) by Rs. 50,000 (an expense)

Decrease in Gash balance by Rs. 30,000 (an asset)

Increase in creditor Mr. Afzal by Rs. 20,000.(a liability).

.in this transaction goods worth Rs. 50,000 have been purcahsed and the amount paid in cash to Mr. Afzal is Rs. 30,000, which means the balance amount of Rs. 20,000 is payable to him, so it is liability of the business.

TRANSACTION NO. 6

He sells goods for cash Rs. 18,000. ANALYSIS:

There are two changes:

1. Increase in cash by Rs. 18,000 (an asset).

2. . Decrease in goods or increase in sales (a revenue) by Rs. 18,000.

TRANS ACTION NO. 7

He sells goods for Rs. 10,000 to Mr. Naeem on credit basis. ANALYSIS:

The two changes are:

1. : Increase in debtor Mr. Naeem (an asset) by Rs. 10,000

2. Decrease in goods or increase, in sales (a revenue) by Rs. 10,000.

•UtmeSSTMmACTTOMt AND DOUMJtNTHY SYSTEM

ION NO. 8

He purchases stationery for Rs. 6,000.

two changes are: t.

Increase in stationery by Rs. 6,000 (a consumable asset).

Decrease in Cash balance by .Rs.' 6,000 (an asset).

•ION NO. 9

He purchases a weighing scale and a safe for Rs. 20,000 and pays, by cheque,. LTSS:

Hie two changes are:

L Increase in weighing scale and safe by Rs. 20,000 (an asset). 2. Decrease in bank balance by Rs. 20,000 (an asset).

ION NO. 10

He pays Rs. 12,000 to Mr. Afzal on account. LYSIS:

r. AfzaTis creditor (a liability) of the business for Rs. 20,000 and now Rs. 12,000 have to him and the balance of Rs. 8,000 is still payable to him. The two changes are;

1. . Decrease in cash by Rs. 12,000 (an asset).

2- Decrease in creditor Mr. Afzal by Rs. 12,000 (a liability).,

ION NO. T1

He returns defective goods to Mr. Afzal worth Rs. 2,000.

LYSIS:

In (his transaction, goods purchased ,from Mr. Afzal have been returned .to him, so !will be a reduction in the amount payable (a liability) to Mr. Afzal by Rs. 2,000. The two

are: L Decrease in goods or increase in purchases returns (Decrease in expense), by

2. Decrease in creditor Mr; Afzal by Rs. 2,000-(a liability).

'ION NO. 12

Goods are returned by Mr. Naeem Rs. 1,000 to the business. .YSIS:

In this transaction goods sold to Mr. Naeem have been returned by him to the business lljOOO, so there will be a reduction in the amount receivable from Mr. Naeem (a debtor) by (1,000. The two changes are:

Decrease in debtor Mr. Naeem by Rs. .1,000 (an asset).

Increase in goods or increase in Sales returns (decrease-in revenue) by Rs. 1,000.

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Gash paid to Mr. Afzal Rs. 5,600 in full satisfication of his claim of Rs. 6,000. ANALYSIS:

The amount payable to Mr. Afzal (a creditor), is Rs. 6,000. In this transaction, it is assumed tha.t payment is made to him before the due date and that is why, business is receiving a cash discount of Rs. 400 (a revenue) from Mr. Afzal. In full satisfaction', we mean by paying him Rs. 5,600, the liability is settled in full (Rs. 6,000). There are three changes in this transaction:

Decrease in Cash Rs. 5,600 (an asset).

Decrease in creditor Mr. Afzal (a liability) by Rs. 6,000.

Increase in discount received by Rs. 400 (a revenue).

TRANSACTION NO. 14

Cash received from Mr. Naeem (a debtor) Rs. 8,800 in fall satisfaction of his debts of Rs. 9,000.

ANALYSIS:

The amount receivable from Mr. Naeem is Rs. 9,000. In this transaction, it is assumed that Mr. Naeem is paying his debts before the due date and that is why, business allows him a discount (a concession) of Rs. 200 (an expense or loss to the. business). In full satisfaction, we mean by receiving Rs. 8,800 from him, his account is settled in full (Rs. 9,000). These are three changes in this business transaction;

Increase in Gash Rs. 8,800 (an asset).

Decrease in debtor Mr. Naeem by Rs. 9,000 (an asset).

Increase in discount allowed by Rs. 200 (an expense or loss).

TRANSACTION NO. 15

Cash withdrawn from the bank for business use Rs. 10,000. ANALYSIS:

The two changes are;

Increase in Cash balance Rs. 10,000 (an asset).

Decrease in bank balance Rs. 10,000 (an asset).

TRANSACTION NO. 16

Interest ia paid on money borrowed from Mr. Saleem Rs. 1,000.

ANALYSIS:

There are two changes:

Increase in interest expense (an expense incurred) by Rs. 1,000.

Decrease in Cash balance Rs. 1,000 (an asset).

OBJECTS ACCOUNTING

OBJECTS CNF ACCOUNTING

[l. Financial information is necessary, in order to run a business in an efficient manner. Reliable

information will be available only through keeping proper books of accounts.

Proper accounting is essential, if money is to be borrowed for the purpose of business. The tender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information available from books of accounts is the means of measuring such solvency.

[3. Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained.

4. Payment of sales tax and income tax is only possible if books of accounts are maintained.

In case of any dispute, books of accounts can be produced hi the court of law as a documentary evidence.

Government fixes up fair prices, formulates industrial policy, prepares.economic plans, decides import-export quotas and does many other functions on the basis of accounting information available from books of accounts.

Proper Accounts

It is all the more necessary for an organisation or a concern to keep proper accounts. At the end e the year the true result of the economic activities of a concern must be made available otherwise it will nc be possible to run the concern. In case of a business concern the profit or loss at the end of a year must b ascertained, because, the amount of profit must be adequate in relation to that of investment made in th business. If it is not so or if there is a loss, it is an indication of some defects existing somewhere in ft management of the business. All such defects need to be detected and analysed and appropriate measure taken for their, rectification, but it is only possible, if proper books of accounts are maintained in th business concern. So, the importance of book-keeping to a business is the same as that of fresh air to > man to exist. Without book-keeping records a business would meet death, though not instantly, but m \ short time.

; Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot I ascertained and it.will not be possible to distribute the profit among the owners of the business. The incon tax dues to the Government cannot also be paid. In the absence of books of accounts misuse or defalcatia of money will remain undetected. The owner and other parties interested will not. be able to have aq information about the condition of the business. For the same reason in the case of non-trading concert like, schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognised. . Thus we see that the necessity of keeping accounts is not only confined to business concerns but is also useful for ail classes and grades of people and organisations.