Affect of interest on capital in accounting equation
Answers
Answered by
5
one element
(ii) Transaction affecting any two of the three elements and
ADVERTISEMENTS:
(iii) Transactions affecting all the three elements.
I. Transactions Affecting Only One Main Element:
These transactions may affect any one out of the three main elements.
These transactions can be further classified into three types of transactions viz:
(i) Transactions affecting assets only,
(ii) Transactions affecting liabilities only and
(iii) Transactions affecting capital only.
(i) Transactions Affecting Assets Only:
Business transaction may affect one asset on the one hand and another asset on the other hand.
Transaction:
Purchase of goods in cash.
Affect:
This will increase asset (Stock) on the one hand and decrease asset itself (Cash) on the other hand.
(ii) Transactions Affecting Liabilities Only:
A business transaction may affect one liability on the one hand and another liability on the other hand.
Transaction:
Bills Payable issued to Creditors.
Affect:
This will reduce one liability (Creditors) on the one hand and increase another liability (Bills Payable) on the other hand.
(iii) Transactions Affecting Capital Only:
These types of transactions affect capital only.
Transaction:
Charging interest on drawings.
Affect:
Being an income of the business, this will increase the proprietor’s capital with the amount of interest on drawings and decreases proprietor’s capital with same amount.
Transaction:
Interest on capital.
Affect:
Being an expense of the business, this will reduce the capital by the amount of interest and on the other hand interest on capital would be added to the capital of the proprietor.
II. Transactions Affecting Any Two Main Elements:
These transactions may affect any two out of the three elements and can be classified into three types of transactions viz.
(i) Transactions affecting Assets & Liabilities
(ii) Transactions affecting Assets & Capital and
(iii) Transactions affecting Liabilities & Capital.
(i) Transactions Affecting Assets & Liabilities:
These transactions can be sub-classified into two categories:
(a) Increase in assets & increase in liabilities and
(b) Decrease in assets & decrease in liabilities.
.
(ii) Transaction affecting any two of the three elements and
ADVERTISEMENTS:
(iii) Transactions affecting all the three elements.
I. Transactions Affecting Only One Main Element:
These transactions may affect any one out of the three main elements.
These transactions can be further classified into three types of transactions viz:
(i) Transactions affecting assets only,
(ii) Transactions affecting liabilities only and
(iii) Transactions affecting capital only.
(i) Transactions Affecting Assets Only:
Business transaction may affect one asset on the one hand and another asset on the other hand.
Transaction:
Purchase of goods in cash.
Affect:
This will increase asset (Stock) on the one hand and decrease asset itself (Cash) on the other hand.
(ii) Transactions Affecting Liabilities Only:
A business transaction may affect one liability on the one hand and another liability on the other hand.
Transaction:
Bills Payable issued to Creditors.
Affect:
This will reduce one liability (Creditors) on the one hand and increase another liability (Bills Payable) on the other hand.
(iii) Transactions Affecting Capital Only:
These types of transactions affect capital only.
Transaction:
Charging interest on drawings.
Affect:
Being an income of the business, this will increase the proprietor’s capital with the amount of interest on drawings and decreases proprietor’s capital with same amount.
Transaction:
Interest on capital.
Affect:
Being an expense of the business, this will reduce the capital by the amount of interest and on the other hand interest on capital would be added to the capital of the proprietor.
II. Transactions Affecting Any Two Main Elements:
These transactions may affect any two out of the three elements and can be classified into three types of transactions viz.
(i) Transactions affecting Assets & Liabilities
(ii) Transactions affecting Assets & Capital and
(iii) Transactions affecting Liabilities & Capital.
(i) Transactions Affecting Assets & Liabilities:
These transactions can be sub-classified into two categories:
(a) Increase in assets & increase in liabilities and
(b) Decrease in assets & decrease in liabilities.
.
Similar questions