Page 20 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 3. If a loan of 1,50,000 are taken from the SBI, it will also affect the accounting equation by
two sides. On one side, cash will increase and on the other side, liabilities of the business
will increase. This may be depicted as follows:
Capital + Liability (Loan) = Plant + Cash
2,00,000 + 1,50,000 = 50,000 + (1,50,000 + 1,50,000)
3,50,000 = 3,50,000
4. If some goods of 20,000 are purchased on credit, it will also affect the accounting equation
in two ways. On one side it increases the goods and on the other side it increases the liability
(creditors). Now the changed form of the above accounting equation will be as follows:

Capital + Loan + Creditors = Plant + Cash + Goods
2,00,000 + 1,50,000 + 20,000 = 50,000 + 3,00,000 + 20,000
3,70,000 = 3,70,000
Capital + Liabilities = Assets

Notes By observing the effect of above transactions on the accounting equation, we note
that total of assets always remain equal to the total of capital and liabilities. Thus, the
principle of double entry system may be summarized as for every debit side there is an
equivalent credit side and vice versa.

Task What will be the impact of following transactions on balance sheet?

1. R started business with cash of 500000
2. Machinery purchased for 100,000.
3. Payment made to creditors of 20000

4. Goods sold for 15000



Caselet ICAI told to Hasten Process for Double-entry
Accounting System

“ here is a need to set up a separate committee for converting the single entry
accounting system to double entry. The process is rather slow. It should be hastened,”
TMr K. Rahman Khan, Honorary Deputy Chairman, Rajya Sabha, and member of
the Institute of Chartered Accountants of India (ICAI), said.

While stating that the accounting system has already been converted to double entry in
local bodies, Mr Khan added that the institute should play a vital role in monitoring
governmental expenditure.
“A chartered accountant’s responsibility should not be limited to his clients alone. He owes
it to the society. The institute and the custodian of government expenditure – Comptroller
Contd...

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