Write journal entries for the following transactions and explain accou...
Journal Entries for the Transactions:
(1) Cash brought in to commence business:
Journal Entry:
Cash Account (Dr) 50,000
Capital Account (Cr) 50,000
Explanation:
When ` 50,000 is brought in cash to commence the business, it increases the cash balance and also the capital of the owner. Therefore, the cash account is debited with ` 50,000, representing the increase in the asset, and the capital account is credited with ` 50,000, representing the increase in the owner's equity.
(2) Purchase of goods from B:
Journal Entry:
Purchase Account (Dr) 8,000
B Account (Cr) 8,000
Explanation:
When goods worth ` 8,000 are purchased from B, it increases the inventory (an asset) and at the same time, a liability is created towards B. Therefore, the purchase account is debited with ` 8,000, representing the increase in the asset, and the B account is credited with ` 8,000, representing the increase in the liability.
(3) Payment of wages:
Journal Entry:
Wages Account (Dr) 6,000
Cash Account (Cr) 6,000
Explanation:
When ` 6,000 is paid for wages, it decreases the cash balance and also the wages expense is recognized. Therefore, the wages account is debited with ` 6,000, representing the increase in the expense, and the cash account is credited with ` 6,000, representing the decrease in the asset.
Explanation based on Accounting Equation:
The accounting equation is Assets = Liabilities + Owner's Equity. Based on this equation, the accounting treatments for the given transactions can be understood as follows:
- Transaction (1): When ` 50,000 is brought in cash to commence the business, it increases the cash asset and also the capital (owner's equity) of the business. Therefore, both the asset and owner's equity are increased by ` 50,000.
- Transaction (2): When goods worth ` 8,000 are purchased from B, it increases the inventory asset and at the same time, a liability is created towards B. Therefore, the asset (inventory) and liability (due to B) both increase by ` 8,000.
- Transaction (3): When ` 6,000 is paid for wages, it decreases the cash asset and also recognizes the wages expense. Therefore, the asset (cash) decreases by ` 6,000 and the expense (wages) increases by ` 6,000.
Overall, the accounting equation remains balanced as the increase in assets is offset by the increase in liabilities and owner's equity or the decrease in assets is offset by the decrease in liabilities and owner's equity.