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How to write accounting equation for charge interest on capital @ 10% for a year in a proper format?
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Accounting Equation for Charging Interest on Capital @ 10% for a Year
The accounting equation is a basic principle in accounting that represents the relationship between the assets, liabilities, and equity of a business. When charging interest on capital at a certain rate, the accounting equation is affected in the following ways:
1. Increase in Equity
When interest is charged on capital, it is considered as an expense for the business. As a result, it reduces the profit and increases the amount of capital owed to the owner. The equity of the business increases, which is represented on the balance sheet.
2. Increase in Liability
As the business owes the owner a certain amount of money, it is considered as a liability for the business. When interest is charged on capital, the amount of liability increases. This is because the business is obligated to pay the owner interest on the capital invested.
3. No Effect on Assets
The charging of interest on capital does not affect the assets of the business. The assets of the business remain the same, as the business is not buying or selling any assets.
Accounting Equation
The accounting equation for charging interest on capital @ 10% for a year can be represented as follows:
Assets = Liabilities + Equity
Where:
- Assets represent the resources owned by the business
- Liabilities represent the obligations owed by the business
- Equity represents the capital owed to the owner
Example
Suppose a business owner invested INR 1,00,000 as capital in the business. The business charged interest on the capital @ 10% for a year. The accounting equation for this scenario can be represented as follows:
Assets = Liabilities + Equity
0 = INR 10,000 + INR 1,00,000
Where:
- Assets are assumed to be zero
- Liabilities represent the interest owed to the owner, which is INR 10,000
- Equity represents the capital invested by the owner, which is INR 1,00,000
In this scenario, the equity of the business has increased by INR 1,00,000, and the liability has increased by INR 10,000. This is how charging interest on capital @ 10% for a year affects the accounting equation.
The accounting equation is a basic principle in accounting that represents the relationship between the assets, liabilities, and equity of a business. When charging interest on capital at a certain rate, the accounting equation is affected in the following ways:
1. Increase in Equity
When interest is charged on capital, it is considered as an expense for the business. As a result, it reduces the profit and increases the amount of capital owed to the owner. The equity of the business increases, which is represented on the balance sheet.
2. Increase in Liability
As the business owes the owner a certain amount of money, it is considered as a liability for the business. When interest is charged on capital, the amount of liability increases. This is because the business is obligated to pay the owner interest on the capital invested.
3. No Effect on Assets
The charging of interest on capital does not affect the assets of the business. The assets of the business remain the same, as the business is not buying or selling any assets.
Accounting Equation
The accounting equation for charging interest on capital @ 10% for a year can be represented as follows:
Assets = Liabilities + Equity
Where:
- Assets represent the resources owned by the business
- Liabilities represent the obligations owed by the business
- Equity represents the capital owed to the owner
Example
Suppose a business owner invested INR 1,00,000 as capital in the business. The business charged interest on the capital @ 10% for a year. The accounting equation for this scenario can be represented as follows:
Assets = Liabilities + Equity
0 = INR 10,000 + INR 1,00,000
Where:
- Assets are assumed to be zero
- Liabilities represent the interest owed to the owner, which is INR 10,000
- Equity represents the capital invested by the owner, which is INR 1,00,000
In this scenario, the equity of the business has increased by INR 1,00,000, and the liability has increased by INR 10,000. This is how charging interest on capital @ 10% for a year affects the accounting equation.
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How to write accounting equation for charge interest on capital @ 10% for a year in a proper format?
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How to write accounting equation for charge interest on capital @ 10% for a year in a proper format? for Class 11 2024 is part of Class 11 preparation. The Question and answers have been prepared according to the Class 11 exam syllabus. Information about How to write accounting equation for charge interest on capital @ 10% for a year in a proper format? covers all topics & solutions for Class 11 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for How to write accounting equation for charge interest on capital @ 10% for a year in a proper format?.
How to write accounting equation for charge interest on capital @ 10% for a year in a proper format? for Class 11 2024 is part of Class 11 preparation. The Question and answers have been prepared according to the Class 11 exam syllabus. Information about How to write accounting equation for charge interest on capital @ 10% for a year in a proper format? covers all topics & solutions for Class 11 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for How to write accounting equation for charge interest on capital @ 10% for a year in a proper format?.
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