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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Anil Kumar, a sole trader, started business with cash ₹5,00,000. He bought furniture for ₹1,00,000 in cash and goods for ₹2,00,000 on credit from Bose Ltd. He then sold goods costing ₹80,000 for ₹1,20,000 in cash. Using the accounting equation and ignoring all other items, what are the total liabilities and the capital at the end, with the profit added to capital?

Liabilities are ₹2,00,000 and capital is ₹5,40,000. The creditor Bose Ltd accounts for the liability, and capital is the initial ₹5,00,000 plus the profit of ₹40,000 on the sale. Total assets of ₹7,40,000 equal liabilities plus capital, which confirms the result.

  1. ALiabilities ₹2,00,000; capital ₹5,40,000Correct
  2. BLiabilities ₹2,00,000; capital ₹5,00,000
  3. CLiabilities ₹2,00,000; capital ₹6,20,000
  4. DLiabilities ₹1,20,000; capital ₹5,40,000

Explanation

Profit on sale is ₹1,20,000 minus ₹80,000 = ₹40,000, so capital is ₹5,00,000 + ₹40,000 = ₹5,40,000. The liability is the ₹2,00,000 owed to Bose Ltd. Check the assets: cash 5,00,000 - 1,00,000 + 1,20,000 = 5,20,000, furniture 1,00,000, stock 1,20,000 = 7,40,000, which equals 2,00,000 + 5,40,000. Using sales of ₹1,20,000 as profit would wrongly give ₹6,20,000.

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