We shall consider five transactions and show how they are accounted for in the books of the business.
1. Mr. Rajesh brings Rs.100000 cash as capital into his business.
2. He purchases Mobile Set to his shop Rs.10000
3. He buys currencies for cash Rs.50000
4. He sells currencies worth Rs.30000 for Rs.40000 on credit to Arjun
5. He pays wages to servants Rs.1000
Transaction 1: The business receives capital in cash. Capital is a liability and cash is an asset to the business.
Transaction 2: Mobile Set is purchased for cash. This transaction can be reflected as under
Cash Rs. (100000- 10000)
Transaction 3: Purchased of currencies for cash. This can be reflected in the statement as under.
Cash Rs. (90000- 50000)
Transaction 4: Sold currencies to Arjun on credit for Rs.40000, the cost of which is only Rs. 30000. In this transaction the affected accounts are Currencies account, Arjun account and Profit & Loss account. Since the profit belongs to the owner it is fair to add it to the owner’s capital. The effect of this transaction can appear on the statement as shown below:
Transaction 5: Payment of wages Rs.1000.The cash balance gets reduced in the asset side and profit gets reduced as a result of the expenditure (wages account) on the liability side. This changes the statement as shown below:
Cash (40000 – 1000)
According to above book keeping entry Mr. Rajesh brings Rs.100000 cash as capital into his business. And one end of 5 transection his capital is Rs 109000. so, it is clear that Firm earn profit of Rs 9000.
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