The effect of a transaction to accounting equation is given below.Assets = Equity + Liabilities- = -5000 + 5000Above transaction could be1. Settling a creditor for Rs. 5000 by owners personal money.2. Purchasing goods for Rs. 5000 on credit3. Obtaining a bank loan for Rs. 50004. Receiving a discount for Rs. 5000 when settling a creditor5. Receiving the monthly electricity bill for 5000 (…..)
Question
The effect of a transaction to accounting equation is given below.Assets = Equity + Liabilities- = -5000 + 5000Above transaction could be1. Settling a creditor for Rs. 5000 by owners personal money.2. Purchasing goods for Rs. 5000 on credit3. Obtaining a bank loan for Rs. 50004. Receiving a discount for Rs. 5000 when settling a creditor5. Receiving the monthly electricity bill for 5000 (…..)
Solution
The transaction that fits the given accounting equation (Assets = Equity + Liabilities- = -5000 + 5000) is option 1: Settling a creditor for Rs. 5000 by owners personal money.
Here's why:
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Settling a creditor for Rs. 5000 by owners personal money: This transaction decreases the company's liabilities (creditor is paid off, so liability decreases by Rs. 5000) and the owner's equity (since the owner used personal money, not company's assets, to pay off the creditor, so equity decreases by Rs. 5000). This fits the given equation.
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Purchasing goods for Rs. 5000 on credit: This transaction would increase both assets (goods) and liabilities (credit), not decrease them.
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Obtaining a bank loan for Rs. 5000: This transaction would increase both assets (cash) and liabilities (loan), not decrease them.
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Receiving a discount for Rs. 5000 when settling a creditor: This transaction would decrease liabilities (creditor is paid off) but would not affect assets or equity.
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Receiving the monthly electricity bill for 5000: This transaction would increase liabilities (bill to be paid) but would not affect assets or equity.
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