Accounting Equation — Practice Quiz

Assets increase, Liabilities increase

Step 1: Goods purchased on credit means goods are received but cash is not paid immediately. Step 2: Goods (an asset) increase by ₹40,000. Step 3: Since payment is not made yet, Rohit becomes a creditor — Liabilities increase by ₹40,000. Step 4: Capital is not affected because no profit or loss occurred. Step 5: Both sides of the equation increase equally, keeping the equation balanced: Assets (+40,000) = Capital (0) + Liabilities (+40,000).

Capital decreases

Step 1: Salaries paid is an expense for the business. Step 2: All expenses reduce the net income of the business. Step 3: Since net income belongs to the owner, it is represented in the Capital account. Step 4: Therefore, expenses reduce Capital. Step 5: Also, cash (asset) decreases by the amount paid, and capital decreases by the same amount, keeping the equation balanced.

Capital = Assets – Liabilities

Step 1: Start with the basic Accounting Equation: Assets = Capital + Liabilities. Step 2: To find Capital, rearrange the equation by moving Liabilities to the other side. Step 3: Capital = Assets – Liabilities. Step 4: For example, if Assets = ₹6,00,000 and Liabilities = ₹1,00,000, then Capital = ₹6,00,000 – ₹1,00,000 = ₹5,00,000. Step 5: Option A is wrong — adding liabilities would overstate capital. Options B and D are mathematically incorrect.

Capital increases by ₹5,000

Step 1: Goods costing ₹15,000 were sold for ₹20,000, so the profit on this transaction = ₹20,000 – ₹15,000 = ₹5,000. Step 2: Profit (revenue) increases the owner's Capital. Step 3: The goods (asset) decrease by ₹15,000 (cost), and Rahul (Debtor/asset) increases by ₹20,000. Step 4: Net effect on assets = +₹20,000 – ₹15,000 = +₹5,000. Step 5: To keep the equation balanced, Capital also increases by ₹5,000 (the profit earned).