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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

A trader begins business with cash Rs 3,00,000. He then buys furniture for Rs 50,000 on credit from Modern Furnishers. Which of the following correctly shows the accounting equation immediately after the second transaction?

Assets are Rs 3,50,000, made of cash Rs 3,00,000 and furniture Rs 50,000. Furniture bought on credit creates a liability of Rs 50,000 to the supplier. Capital remains Rs 3,00,000, so the equation balances as assets Rs 3,50,000 equal liabilities Rs 50,000 plus capital Rs 3,00,000.

  1. AAssets Rs 3,50,000 = Liabilities Rs 50,000 + Capital Rs 3,00,000Correct
  2. BAssets Rs 3,00,000 = Liabilities Rs 50,000 + Capital Rs 2,50,000
  3. CAssets Rs 3,00,000 = Liabilities Rs 0 + Capital Rs 3,00,000
  4. DAssets Rs 3,50,000 = Liabilities Rs 0 + Capital Rs 3,50,000

Explanation

Cash Rs 3,00,000 plus furniture Rs 50,000 gives assets of Rs 3,50,000. The credit purchase creates a creditor of Rs 50,000, so liabilities are Rs 50,000 and capital stays Rs 3,00,000. Option 4 wrongly raises capital, though a credit purchase does not add owner's funds.

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