Account 3 Marks Question

	Effect of Transaction	Example
i.	Increase in an asset and a liability.	Goods purchased on credit.
ii.	Decrease in an asset and a liability.	Cash paid to creditors.
iii.	Increase in assets and capital.	Additional capital brought in by the proprietor.
iv.	Decrease in assets and capital.	Salary paid in Cash.

Raghubir is a creditor, which means, it is a liability for the business. As we know, increase in liability is recorded on the credit side while decrease in liability will be shown on the debit side of the concerned liability account.

Increase in Creditors (being a liability) will be shown on the credit side and decrease in the creditors will be recorded on the debit side of the Creditors Account.

Note: Transaction Number (4) will not be recorded in Creditors Account as goods are purchased for cash. Thus, there will be no impact on Creditors Account.

	Accounts	Increase Recorded at Side	Nature
i.	Furniture	Debit	Asset
ii.	Rent Paid	Debit	Expense
iii.	Commission Received	Credit	Income
iv.	Salary Paid	Debit	Expense
v.	Proprietor’s Account	Credit	Capital
vi.	Debtor	Debit	Asset
vii.	Creditor	Credit	Liability

	Accounts	Increase Recorded at Side	Increase Recorded at Side
i.	Furniture	Debit	Asset
ii.	Wages Paid	Debit	Expense
iii.	Rent Received	Credit	Income
iv.	Cash	Debit	Asset
v.	Proprietor’s Account	Credit	Capital
vi.	Debtor	Debit	Asset
vii.	Prepaid Insurance	Debit	Asset
viii.	Outstanding Salary	Credit	Liability

As we know, Machinery Account is an asset, so, increase in machinery will be recorded on the debit side while decrease in machinery will be recorded on the credit side of the Machinery Account.

The elements of fundamental accounting equation are Capital, Assets and Liabilities. Assets = Things that a business owns Liabilities = Things that a business owes Capital = Amount invested by the owner in the businessThe equation is:
Capital = Assets + Liabilities Expenses and Revenue are related to capital; increase in revenue leads to increase in capital while expenses leads to decrease in capital. It is because any income/ expense belongs to the owner and thus his capital in the business gets affected with the amount of expenses incurred and revenue earned.

• Revenue: Owner's equity (Capital) is increased by the amount of revenue.
• Expenses: Owner's equity (Capital) is increased by the amount of revenue.

Income = Revenue - Expense Income is the profit earned during an accounting period. Profit increases the owner's equity (Capital) and loss decreases the owner's equity (Capital).

Increase in Debtors (being an asset) will be shown on the debit side and decrease in them will be recorded on the credit side of the Debtors Account.

Opening Capital (Capital as on March 31, 2011) = ₹ 3,00,000 Calculation of Closing Capital (Capital as on March 31, 2012)Assets = Liabilities + Capital
5,00,000 = 1,00,000 + Capital
Capital = ₹ 4,00,000
Calculation of Profit Earned during the year
Closing Capital = Opening Capital + Additional Capital + Profit - Drawings
4,00,000 = 3,00,000 + 0 + Profit - 0
Profit = 4,00,000 - 3,00,000
= ₹ 1,00,000

	Accounts	Decrease Recorded at Side	Nature
i.	Cash	Credit	Asset
ii.	Bank Overdraft	Debit	Liability
iii.	Rent Paid	Credit	Expense
iv.	Outstanding Rent	Debit	Liability
v.	Prepaid Insurance	Credit	Asset
vi.	Manoj, Proprietor of the business	Debit	Capital

As we know, Furniture is an asset, so, increase in furniture will be recorded on the debit side while decrease in furniture will be recorded on the credit side of the Furniture Account.

1. Increase in Cash (being an asset) will be shown on the debit side and decrease in cash will be recorded on the credit side of the Cash Account.

2. Increase in Debtors (being an asset) will be shown on the debit side and decrease in them will be recorded on the credit side of the Debtors Account.

3. Increase in Creditors (being a liability) will be shown on the credit side and decrease in the creditors will be recorded on the debit side of the Creditors Account.