Recording of Transactions Test - 4

When wages are paid for the installation of machinery, the Machinery Account is debited. This reflects the increase in the value of the machinery asset. It follows the accounting principle of capitalization, adding installation costs to the machinery's cost. Thus, debiting Machinery A/c ensures accurate recognition of the asset's total cost.

                                                                       Journal

We know that the accounting equation,

Assets = Liabilities + Capital

So, opening capital = Assets - Liabilities 

= Rs. 1,50,000 - Rs. 60,000 

= Rs. 90,000.

A credit voucher typically pertains to transactions where credit is extended, meaning that payment is not made immediately but is expected to be made at a later date. 

Purchase of goods for cash does not involve extending credit to the seller; instead, it involves immediate payment in cash for the goods purchased. Therefore, it is not associated with credit vouchers, which are typically used for transactions involving the extension of credit or deferred payment.

The Drawings Account is used to record withdrawals made by the owner for personal use. Paying a life insurance premium using business cash reduces the funds available for business purposes and represents a withdrawal of assets by the proprietor. So, the Drawings Account should be debited to reflect this decrease in the proprietor's equity.

A credit balance in Bank column of cash book indicates overdraft. A credit balance in the Bank column of the cash book means that the amount recorded on the credit side (i.e., money deposited in the bank) exceeds the amount recorded on the debit side (i.e., money withdrawn from the bank). This situation is commonly known as an overdraft, where the bank account is overdrawn, and the company owes money to the bank.

The debit side of a double-column cash book primarily records both cash and bank payments and receipts. It primarily records cash payments made by the business, including expenses, purchases, and any other cash outflows. Additionally, it also records bank payments made through checks or other bank transactions. Therefore, the debit side serves as a comprehensive record of all cash and bank disbursements. This allows for efficient tracking of outgoing funds and ensures accurate financial management by capturing all cash and bank transactions in one place.

The rule of debit and credit is a fundamental principle in accounting that governs how transactions are recorded. It states that:

Debit entries represent increases in assets, expenses, and losses and credit entries represent increases in liabilities, equity, and revenue. Credit decreases equity is correct. Credits are used to increase equity accounts, and a credit entry would decrease equity if applied to an equity account with a credit balance.

We know that the accounting equation:

Assets = Liabilities + Capital

Assets on 31st March, 2014 = Rs. 8,00,000

Liabilities on 31st March, 2014 = Rs. 50,000

Capital on 1st April, 2013 = Rs. 6,00,000

We can rearrange the accounting equation to solve for the closing capital:

Capital = Assets - Liabilities

Capital = Rs. 8,00,000 - Rs. 50,000

Capital = Rs. 7,50,000

Therefore, the closing capital of X on 31st March, 2014 is Rs. 7,50,000.

An opening entry is made to bring forward the balances of personal and real accounts from the previous year's balance sheet. It marks the beginning of a new accounting period, allowing for the continuation of recording transactions. Unlike closing entries, which finalize accounts at the end of an accounting period, opening entries initiate the accounting process for the new period by establishing the initial balances.