Skip to content

CMA Foundation · Fundamentals of Financial and Cost Accounting · Journal and Ledger

Under the accounting equation, a business pays Rs 20,000 to a creditor in cash. What is the effect of this transaction?

Paying a creditor in cash reduces cash, an asset, and reduces creditors, a liability, by the same Rs 20,000. Both sides of the accounting equation fall equally, so it remains balanced. Capital is unchanged because no expense or drawing has occurred.

  1. AAssets decrease by Rs 20,000 and liabilities decrease by Rs 20,000Correct
  2. BAssets increase by Rs 20,000 and liabilities decrease by Rs 20,000
  3. CAssets decrease by Rs 20,000 and capital decreases by Rs 20,000
  4. DOnly liabilities decrease by Rs 20,000, with no change in assets

Explanation

Cash is an asset and falls by Rs 20,000. The creditor is a liability and also falls by Rs 20,000. The equation stays balanced. Capital is not affected, so the option showing a capital decrease is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Journal and Ledger shows your real accuracy, how long you take and where you lose marks.

Practise Journal and LedgerFree diagnostic mock

More Journal and Ledger questions