An asset was purchased for Rs. 5,00,000 with the down payment of Rs. 1,00,000 and bills accepted for Rs. 4,00,000. What would be the effect on the total asset and total liabilities in the Balance Sheet?
Let's break down this accounting transaction step by step to see how it affects the total assets and total liabilities in the Balance Sheet. The transaction involves the purchase of an asset.
The asset purchased has a value of Rs. 5,00,000. This increases one type of asset for the business.
However, the payment for this asset is made in two parts:
- A down payment of Rs. 1,00,000 is made. A down payment usually means paying cash or using money from the bank. Cash and bank balances are also assets. So, making a down payment of Rs. 1,00,000 decreases the cash/bank asset.
- Bills accepted for Rs. 4,00,000. When bills are accepted for a purchase, it means the business has promised to pay this amount later. This creates a liability, specifically Bills Payable, for Rs. 4,00,000.
Analyzing the Effect on Total Assets from the Asset Purchased
The transaction affects different asset accounts:
- A new asset (the item purchased) increases by $\text{Rs. } 5,00,000$.
- The cash or bank asset decreases by $\text{Rs. } 1,00,000$ due to the down payment.
The net effect on total assets is the increase from the new asset minus the decrease from the down payment:
Net increase in Total Assets = Increase in New Asset - Decrease in Cash/Bank
Net increase in Total Assets = $\text{Rs. } 5,00,000 - \text{Rs. } 1,00,000 = \text{Rs. } 4,00,000$
So, the total asset value on the Balance Sheet increases by Rs. 4,00,000.
Analyzing the Effect on Total Liabilities
The transaction involves accepting bills for the remaining amount owed:
- Bills Payable, which is a type of liability, increases by $\text{Rs. } 4,00,000$.
There are no other liabilities mentioned in the transaction that are affected. So, the total liabilities increase by Rs. 4,00,000.
Overall Effect on the Balance Sheet and the Accounting Equation
The Balance Sheet is based on the fundamental accounting equation: Assets = Liabilities + Owner's Equity. Any transaction must keep this equation balanced.
Let's summarize the changes:
- Total Assets increased by $\text{Rs. } 4,00,000$.
- Total Liabilities increased by $\text{Rs. } 4,00,000$.
- Owner's Equity is not directly affected by this asset purchased transaction.
Let's check the accounting equation:
Change in Assets = Change in Liabilities + Change in Owner's Equity
$\text{Rs. } 4,00,000$ (Increase in Assets) = $\text{Rs. } 4,00,000$ (Increase in Liabilities) + $\text{Rs. } 0$ (Change in Owner's Equity)
$\text{Rs. } 4,00,000 = \text{Rs. } 4,00,000$
The equation remains balanced. This shows that the net effect of the asset purchased transaction is an increase in total assets and an equal increase in total liabilities.
Summary of Changes in Balance Sheet Elements
| Item | Account Type | Amount (Rs.) | Effect |
| New Asset (Purchased) | Asset | $5,00,000$ | Increase |
| Cash / Bank (Down Payment) | Asset | $1,00,000$ | Decrease |
| Bills Payable | Liability | $4,00,000$ | Increase |
Net effect on Total Assets: $\text{Rs. } 5,00,000$ Increase - $\text{Rs. } 1,00,000$ Decrease = $\text{Rs. } 4,00,000$ Increase
Net effect on Total Liabilities: $\text{Rs. } 4,00,000$ Increase
Therefore, the total asset and total liabilities in the Balance Sheet both increase by Rs. 4,00,000 as a result of this asset purchased transaction.
Important Questions from Balance sheet statement
What is/are the objective(s) of preparing the trial balance?
Which among the following will be shown as the debit balance in a trial balance?
Reserves and surpluses are shown on which side and under which head in the balance sheet?
In a Balance sheet, expenses incurred but not yet paid are shown as _____.
Given below are two statements:
Statement I : Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income.
Statement II : Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries i.e. they are neither actual liability nor actual asset.
In the light of the above statements, choose the correct answer from the options given below:
