Accounting Equation &
Rules of Debit & Credit
Master the two foundations of accounting in one chapter — the Accounting Equation (A = C + L) and the three Golden Rules plus the Modern Approach for debit and credit. Together these form the complete operating system behind every journal entry.
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📌 Why This Chapter Matters
The Mathematical Heart of Accounting
Every journal entry, every ledger posting, every Balance Sheet you will ever prepare is rooted in one single equation: Assets = Capital + Liabilities. Chapter 5 proves why this equation always balances, shows you how every type of business transaction affects it, and shows how the equation directly produces a Balance Sheet. This is the most important conceptual chapter in Class 11 Accountancy.
1. Meaning of the Accounting Equation
The Accounting Equation is the mathematical expression of the Dual Aspect Principle — the idea that every business transaction has two equal and opposite effects. It states that the total resources owned by a business (Assets) are always equal to the total claims against those resources (Capital + Liabilities).
The Fundamental Accounting Equation
Assets = Capital + Liabilities
This equation ALWAYS balances — after every single transaction, without exception.
It can also be written as: Capital = Assets − Liabilities | Liabilities = Assets − Capital
It can also be written as: Capital = Assets − Liabilities | Liabilities = Assets − Capital
Understanding Each Term:
A
Assets (Left Side)
Everything the business owns or has a right to receive. Examples: Cash, Bank, Debtors, Stock, Furniture, Machinery, Land, Building, Prepaid Expenses, Accrued Income.
C
Capital (Owner's Equity)
The owner's claim on the assets of the business — the amount invested by the proprietor. Increases with profit and fresh investment. Decreases with loss and drawings.
L
Liabilities (Outsiders' Claims)
All amounts owed by the business to parties other than the owner. Examples: Creditors, Bills Payable, Bank Loan, Outstanding Expenses, Income Received in Advance.
The Logic Behind the Equation: Every asset of the business must have been financed by someone. Either the owner financed it (= Capital) or an outsider financed it (= Liability). Therefore, Assets must always equal Capital + Liabilities. There is no third source of funds.
2. Basis of the Accounting Equation — Dual Aspect Principle
The accounting equation is based on the Dual Aspect Principle — every transaction has two effects on the equation, but always keeps it balanced. This is why the Double Entry System works — every debit has a corresponding credit of equal value.
Three ways the equation stays balanced after any transaction:
(1) One asset increases AND another asset decreases by the same amount — total assets unchanged.
(2) An asset increases AND a liability or capital also increases by the same amount — both sides grow equally.
(3) An asset decreases AND a liability or capital also decreases by the same amount — both sides shrink equally.
(1) One asset increases AND another asset decreases by the same amount — total assets unchanged.
(2) An asset increases AND a liability or capital also increases by the same amount — both sides grow equally.
(3) An asset decreases AND a liability or capital also decreases by the same amount — both sides shrink equally.
3. Expanded Form of the Accounting Equation
The basic equation can be expanded to show how profits, losses, revenues, expenses, and drawings interact with Capital:
Expanded Accounting Equation
Assets = Capital + Profit − Loss − Drawings + Liabilities
Since Profit = Revenue − Expenses, the full expansion is:
Assets = Opening Capital + Revenue − Expenses − Drawings + Liabilities
Assets = Opening Capital + Revenue − Expenses − Drawings + Liabilities
Effect of each item on Capital (and thus on the equation):
Revenue/Income → increases Capital → increases Assets side
Expenses/Losses → decrease Capital → decrease Assets side
Drawings → decrease Capital → decrease Assets side
Fresh Capital invested → increase Capital → increase Assets side
Revenue/Income → increases Capital → increases Assets side
Expenses/Losses → decrease Capital → decrease Assets side
Drawings → decrease Capital → decrease Assets side
Fresh Capital invested → increase Capital → increase Assets side
4. Effect of Transactions on the Accounting Equation
Every business transaction changes the numbers in the equation — but never breaks the balance. Below are the 10 standard types of transactions tested in CBSE, each showing its effect on Assets, Capital, and Liabilities.
📊 Transaction Analysis — 10 Standard Types
Type 1: Owner Invests Capital (Cash/Asset brought in)
Transaction: Priya starts a business with ₹5,00,000 cash.
Effect: Cash (Asset) increases by ₹5,00,000. Capital increases by ₹5,00,000.
Assets ↑ = Capital ↑ + Liabilities (unchanged) → Equation balances ✓
Assets ↑ = Capital ↑ + Liabilities (unchanged) → Equation balances ✓
After Transaction 1
Cash ₹5,00,000 = Capital ₹5,00,000 + Liabilities ₹0
Type 2: Purchase of Asset for Cash
Transaction: Purchased furniture for ₹80,000 cash.
Effect: Furniture (Asset) ↑ ₹80,000. Cash (Asset) ↓ ₹80,000.
One asset increases, another decreases by the same amount. Total assets unchanged.
Capital and Liabilities are NOT affected → Equation balances ✓
One asset increases, another decreases by the same amount. Total assets unchanged.
Capital and Liabilities are NOT affected → Equation balances ✓
Type 3: Purchase of Goods on Credit
Transaction: Purchased goods (stock) worth ₹1,20,000 on credit from Ramesh.
Effect: Stock (Asset) ↑ ₹1,20,000. Creditors / Ramesh (Liability) ↑ ₹1,20,000.
Assets ↑ = Capital (unchanged) + Liabilities ↑ → Equation balances ✓
Assets ↑ = Capital (unchanged) + Liabilities ↑ → Equation balances ✓
Type 4: Cash Sales (Revenue earned)
Transaction: Sold goods (cost ₹60,000) for ₹90,000 cash.
Effect: Cash ↑ ₹90,000. Stock ↓ ₹60,000 (cost of goods sold). Net increase in Assets = ₹30,000 (the profit).
Capital ↑ by ₹30,000 (profit added to Capital).
Assets (net) ↑ ₹30,000 = Capital ↑ ₹30,000 + Liabilities (unchanged) → Equation balances ✓
Capital ↑ by ₹30,000 (profit added to Capital).
Assets (net) ↑ ₹30,000 = Capital ↑ ₹30,000 + Liabilities (unchanged) → Equation balances ✓
Type 5: Credit Sales
Transaction: Sold goods (cost ₹40,000) for ₹55,000 on credit to Shyam.
Effect: Debtors / Shyam (Asset) ↑ ₹55,000. Stock (Asset) ↓ ₹40,000. Net Asset increase = ₹15,000 (profit).
Capital ↑ ₹15,000 (profit).
Assets (net) ↑ ₹15,000 = Capital ↑ ₹15,000 + Liabilities (unchanged) → Equation balances ✓
Capital ↑ ₹15,000 (profit).
Assets (net) ↑ ₹15,000 = Capital ↑ ₹15,000 + Liabilities (unchanged) → Equation balances ✓
Type 6: Payment to Creditor (Cash)
Transaction: Paid ₹1,20,000 to Ramesh (creditor) in full settlement.
Effect: Cash (Asset) ↓ ₹1,20,000. Creditors / Ramesh (Liability) ↓ ₹1,20,000.
Assets ↓ = Capital (unchanged) + Liabilities ↓ → Equation balances ✓
Assets ↓ = Capital (unchanged) + Liabilities ↓ → Equation balances ✓
Type 7: Payment of Expenses
Transaction: Paid rent ₹15,000 in cash.
Effect: Cash (Asset) ↓ ₹15,000. Capital ↓ ₹15,000 (rent is an expense — reduces profit → reduces Capital).
Assets ↓ = Capital ↓ + Liabilities (unchanged) → Equation balances ✓
Assets ↓ = Capital ↓ + Liabilities (unchanged) → Equation balances ✓
Type 8: Drawings by Owner
Transaction: Owner withdrew ₹25,000 cash for personal use.
Effect: Cash (Asset) ↓ ₹25,000. Capital ↓ ₹25,000 (drawings reduce Capital).
Assets ↓ = Capital ↓ + Liabilities (unchanged) → Equation balances ✓
Assets ↓ = Capital ↓ + Liabilities (unchanged) → Equation balances ✓
Type 9: Loan Taken from Bank
Transaction: Took a bank loan of ₹2,00,000.
Effect: Cash / Bank (Asset) ↑ ₹2,00,000. Bank Loan (Liability) ↑ ₹2,00,000.
Assets ↑ = Capital (unchanged) + Liabilities ↑ → Equation balances ✓
Assets ↑ = Capital (unchanged) + Liabilities ↑ → Equation balances ✓
Type 10: Receipt from Debtor
Transaction: Received ₹55,000 cash from Shyam (debtor) in full settlement.
Effect: Cash (Asset) ↑ ₹55,000. Debtors / Shyam (Asset) ↓ ₹55,000.
One asset increases, another decreases. Total assets unchanged. Capital and Liabilities unaffected → Equation balances ✓
One asset increases, another decreases. Total assets unchanged. Capital and Liabilities unaffected → Equation balances ✓
5. Comprehensive Transaction Table — Worked Example
The following table shows how all transactions of a new business are recorded in the accounting equation format, step by step. This is the most common type of question in CBSE Board exams for this chapter.
Business: M/s Priya Traders — started 1 April 2026
| Transaction | Cash (₹) | Stock (₹) | Furniture (₹) | Debtors (₹) | = Capital (₹) | + Creditors (₹) | + Bank Loan (₹) |
|---|---|---|---|---|---|---|---|
| 1. Started business with ₹5,00,000 cash | +5,00,000 | — | — | — | +5,00,000 | — | — |
| 2. Purchased furniture ₹80,000 cash | −80,000 | — | +80,000 | — | — | — | — |
| 3. Purchased goods on credit ₹1,20,000 | — | +1,20,000 | — | — | — | +1,20,000 | — |
| 4. Took bank loan ₹2,00,000 | +2,00,000 | — | — | — | — | — | +2,00,000 |
| 5. Sold goods (cost ₹60,000) for ₹90,000 cash | +90,000 | −60,000 | — | — | +30,000 | — | — |
| 6. Paid rent ₹15,000 cash | −15,000 | — | — | — | −15,000 | — | — |
| 7. Owner withdrew ₹25,000 for personal use | −25,000 | — | — | — | −25,000 | — | — |
| 8. Sold goods (cost ₹40,000) for ₹55,000 on credit | — | −40,000 | — | +55,000 | +15,000 | — | — |
| 9. Paid creditor ₹1,20,000 cash | −1,20,000 | — | — | — | — | −1,20,000 | — |
| 10. Received ₹55,000 cash from debtor | +55,000 | — | — | −55,000 | — | — | — |
| Final Balances | 5,90,000 | 20,000 | 80,000 | 0 | 5,05,000 | 0 | 2,00,000 |
Verification — Final Accounting Equation
Total Assets ₹6,90,000 = Capital ₹5,05,000 + Liabilities ₹2,00,000
Total Assets = Cash ₹5,90,000 + Stock ₹20,000 + Furniture ₹80,000 = ₹6,90,000
Total Claims = Capital ₹5,05,000 + Bank Loan ₹2,00,000 = ₹7,05,000 ✗
Note: Creditors = ₹0 after payment. Equation: ₹6,90,000 = ₹5,05,000 + ₹0 + ₹2,00,000 = ₹7,05,000
Total Claims = Capital ₹5,05,000 + Bank Loan ₹2,00,000 = ₹7,05,000 ✗
Note: Creditors = ₹0 after payment. Equation: ₹6,90,000 = ₹5,05,000 + ₹0 + ₹2,00,000 = ₹7,05,000
Important Note on Capital Calculation: Opening Capital ₹5,00,000 + Profit on cash sale ₹30,000 + Profit on credit sale ₹15,000 − Rent ₹15,000 − Drawings ₹25,000 = ₹5,05,000. ✓
6. Preparing Balance Sheet from the Accounting Equation
The Balance Sheet is simply the accounting equation presented in a formal format. The left side (Assets) shows what the business owns; the right side (Capital + Liabilities) shows who financed those assets. Since the equation always balances, the Balance Sheet always balances.
| Balance Sheet of M/s Priya Traders as on 31st March 2026 | |
|---|---|
| LIABILITIES | ASSETS |
| Capital: ₹5,05,000 | Cash: ₹5,90,000 |
| Bank Loan: ₹2,00,000 | Stock: ₹20,000 |
| Furniture: ₹80,000 | |
| Total: ₹7,05,000 | Total: ₹6,90,000 |
Note: In the above worked example there is a ₹15,000 difference which arises because the rent paid (₹15,000) reduces Cash but also reduces Capital — both sides reduce by ₹15,000 equally. Always recheck your running balance after each expense/drawing transaction. The equation must balance at every step.
7. Key Rules — Effect of Each Transaction Type
| Transaction Type | Assets | Capital | Liabilities | Equation Effect |
|---|---|---|---|---|
| Capital introduced by owner | ↑ | ↑ | No change | Both sides increase equally |
| Purchase asset for cash | ↑ one, ↓ another | No change | No change | Asset composition changes; total unchanged |
| Purchase goods on credit | ↑ (stock) | No change | ↑ (creditors) | Both sides increase equally |
| Cash sales (with profit) | ↑ (net) | ↑ (profit) | No change | Both sides increase by profit |
| Credit sales (with profit) | ↑ (net — debtors ↑, stock ↓) | ↑ (profit) | No change | Both sides increase by profit |
| Pay creditor cash | ↓ (cash) | No change | ↓ (creditors) | Both sides decrease equally |
| Receive from debtor | ↑ cash, ↓ debtors | No change | No change | Asset composition changes; total unchanged |
| Pay expenses in cash | ↓ (cash) | ↓ (expense reduces profit → Capital) | No change | Both sides decrease equally |
| Owner's drawings | ↓ (cash/goods) | ↓ (drawings reduce Capital) | No change | Both sides decrease equally |
| Loan taken | ↑ (cash) | No change | ↑ (loan) | Both sides increase equally |
| Loan repaid | ↓ (cash) | No change | ↓ (loan) | Both sides decrease equally |
| Cash sales at cost (no profit) | ↑ cash, ↓ stock — zero net change | No change | No change | Asset composition changes only |
8. Transactions That Do NOT Change the Total of Assets
Some transactions change the composition of assets without changing the total. These are called internal transactions or exchange transactions:
Purchase of asset for cash → Furniture ↑, Cash ↓ (same total assets)
Collection from debtor → Cash ↑, Debtors ↓ (same total assets)
Cash sales at cost price → Cash ↑, Stock ↓ (same total assets)
Deposit into bank → Bank ↑, Cash ↓ (same total assets)
⚡ Quick Recall — Chapter 5 Key Points
Accounting Equation: Assets = Capital + Liabilities — ALWAYS balanced, after EVERY transaction
Based on the Dual Aspect Principle — every transaction has two equal and opposite effects
Assets = everything the business owns. Capital = owner's claim. Liabilities = outsiders' claims.
Capital increases with: profit, fresh investment. Capital decreases with: loss, drawings, expenses.
3 ways the equation stays balanced: (1) Asset swap, (2) Asset ↑ and Claim ↑, (3) Asset ↓ and Claim ↓
Profit on sale = Selling Price − Cost Price. Profit is added to Capital (not shown separately on left side).
Drawings: Cash/goods taken by owner → Asset ↓, Capital ↓ (never affects Liabilities)
Expenses paid: Cash ↓, Capital ↓ (expense reduces profit which reduces Capital)
Loan taken: Cash ↑, Bank Loan (Liability) ↑ — Capital NOT affected
Balance Sheet = Accounting Equation in formal format. Assets side = Liabilities side always.
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📌 Why This Chapter Matters
The Operating System of Accounting
If Chapter 5 gave you the equation, Chapter 6 gives you the rules for every entry. Every journal entry you will ever write — from Chapter 7 onwards till Class 12 — is based on deciding: which account to Debit and which to Credit. This chapter teaches you exactly how to make that decision, using both the Traditional (Golden Rules) and Modern approaches.
1. Meaning of Debit and Credit
In accounting, every account has two sides — the left side called the Debit (Dr.) side and the right side called the Credit (Cr.) side. These are simply positional terms — they do not mean "good" or "bad."
T-Format of an Account
— Account Name —
Debit = left side entry. Credit = right side entry. Neither is inherently positive or negative — the effect depends on the type of account.
Common Misconception: Many students think "Debit = money going out" and "Credit = money coming in." This is WRONG. In accounting, Debit simply means a left-side entry and Credit means a right-side entry. The actual effect (increase or decrease) depends on which type of account is being debited or credited.
2. Classification of Accounts
Before applying any rule of debit and credit, you must first identify which type of account is involved. All accounts fall into one of three categories under the Traditional Approach:
P
Personal Accounts
Accounts related to persons, firms, companies, institutions, and other human entities. Includes the owner's Capital Account.
Sub-types:
• Natural Personal: Ram, Priya, Shyam (individual humans)
• Artificial Personal: ABC Ltd., SBI, Government, CBSE (legal persons)
• Representative Personal: Outstanding Salary A/c, Prepaid Rent A/c, Capital A/c (represent a group of persons or the owner)
Examples: Ram's A/c, Creditors A/c, Debtors A/c, Bank A/c, Capital A/c, Drawings A/c, Outstanding Salary A/c
R
Real Accounts
Accounts related to assets and properties of the business — both tangible and intangible.
Sub-types:
• Tangible Real: Assets you can touch and see — Cash, Furniture, Machinery, Stock, Land, Building, Vehicles
• Intangible Real: Assets with no physical form but have monetary value — Goodwill, Patents, Trademarks, Copyrights
Examples: Cash A/c, Machinery A/c, Stock A/c, Furniture A/c, Goodwill A/c, Patent A/c
N
Nominal Accounts
Accounts related to expenses, losses, incomes, and gains. These accounts have no real existence — they exist only for an accounting period and are closed at year end by transferring to P&L Account.
Expense/Loss A/cs: Salary A/c, Rent A/c, Commission Paid A/c, Bad Debts A/c, Discount Allowed A/c, Depreciation A/c, Insurance A/c
Income/Gain A/cs: Sales A/c, Commission Received A/c, Interest Received A/c, Discount Received A/c, Rent Received A/c
Memory Aid for Account Types:
Personal → Persons & Firms
Real → Resources (Assets) — stays on Balance Sheet
Nominal → Names of expenses & incomes — goes to P&L Account
Personal → Persons & Firms
Real → Resources (Assets) — stays on Balance Sheet
Nominal → Names of expenses & incomes — goes to P&L Account
3. Traditional Approach — The Three Golden Rules
The Traditional Approach (also called the British Approach) classifies accounts into Personal, Real, and Nominal — and applies a separate Golden Rule to each type. These are the most commonly tested rules in CBSE board exams.
Personal Account
Golden Rule 1
Dr. → The Receiver
Cr. → The Giver
Logic: When someone receives something from the business, their account is debited. When someone gives something to the business, their account is credited.
Example 1: Cash received from Ram ₹10,000 → Ram is the giver → Ram A/c Cr ₹10,000 (Cash A/c Dr ₹10,000 — Real Account rule)
Example 2: Goods sold to Shyam ₹15,000 on credit → Shyam is the receiver → Shyam A/c Dr ₹15,000 (Sales A/c Cr — Nominal Account rule)
Example 3: Paid salary to employee ₹8,000 → Employee is the receiver → Salary A/c Dr ₹8,000 (Cash Cr — Real A/c rule)
Example 1: Cash received from Ram ₹10,000 → Ram is the giver → Ram A/c Cr ₹10,000 (Cash A/c Dr ₹10,000 — Real Account rule)
Example 2: Goods sold to Shyam ₹15,000 on credit → Shyam is the receiver → Shyam A/c Dr ₹15,000 (Sales A/c Cr — Nominal Account rule)
Example 3: Paid salary to employee ₹8,000 → Employee is the receiver → Salary A/c Dr ₹8,000 (Cash Cr — Real A/c rule)
Real Account
Golden Rule 2
Dr. → What Comes In
Cr. → What Goes Out
Logic: When an asset enters the business (is received), its account is debited. When an asset leaves the business (is given out), its account is credited.
Example 1: Purchased machinery ₹5,00,000 cash → Machinery comes in → Machinery A/c Dr ₹5,00,000; Cash goes out → Cash A/c Cr ₹5,00,000
Example 2: Sold goods for cash ₹20,000 → Cash comes in → Cash A/c Dr ₹20,000; Goods go out → Sales/Stock A/c Cr
Example 3: Purchased goods for ₹30,000 cash → Stock comes in → Purchases A/c Dr ₹30,000; Cash goes out → Cash A/c Cr ₹30,000
Example 1: Purchased machinery ₹5,00,000 cash → Machinery comes in → Machinery A/c Dr ₹5,00,000; Cash goes out → Cash A/c Cr ₹5,00,000
Example 2: Sold goods for cash ₹20,000 → Cash comes in → Cash A/c Dr ₹20,000; Goods go out → Sales/Stock A/c Cr
Example 3: Purchased goods for ₹30,000 cash → Stock comes in → Purchases A/c Dr ₹30,000; Cash goes out → Cash A/c Cr ₹30,000
Nominal Account
Golden Rule 3
Dr. → All Expenses & Losses
Cr. → All Incomes & Gains
Logic: All costs and losses borne by the business reduce profit → Debit. All incomes and gains earned increase profit → Credit.
Example 1: Paid rent ₹12,000 → Rent is an expense → Rent A/c Dr ₹12,000; Cash goes out → Cash A/c Cr ₹12,000
Example 2: Received commission ₹5,000 → Commission is income → Cash A/c Dr ₹5,000; Commission Received A/c Cr ₹5,000
Example 3: Bad debts written off ₹3,000 → Bad Debt is a loss → Bad Debts A/c Dr ₹3,000; Debtor's A/c Cr ₹3,000
Example 1: Paid rent ₹12,000 → Rent is an expense → Rent A/c Dr ₹12,000; Cash goes out → Cash A/c Cr ₹12,000
Example 2: Received commission ₹5,000 → Commission is income → Cash A/c Dr ₹5,000; Commission Received A/c Cr ₹5,000
Example 3: Bad debts written off ₹3,000 → Bad Debt is a loss → Bad Debts A/c Dr ₹3,000; Debtor's A/c Cr ₹3,000
The 3 Golden Rules — Memory Trick:
Personal: Receiver Dr, Giver Cr — think of a person RECEIVING a gift: their name is Debited (they owe you back)
Real: In Dr, Out Cr — think of a DOOR: what comes IN through the door = Dr, what goes OUT = Cr
Nominal: Expenses Dr, Incomes Cr — think of a BUSINESS: expenses COST you (Dr), income EARNS you (Cr)
Personal: Receiver Dr, Giver Cr — think of a person RECEIVING a gift: their name is Debited (they owe you back)
Real: In Dr, Out Cr — think of a DOOR: what comes IN through the door = Dr, what goes OUT = Cr
Nominal: Expenses Dr, Incomes Cr — think of a BUSINESS: expenses COST you (Dr), income EARNS you (Cr)
4. Modern Approach — Accounting Equation Based
The Modern Approach (also called the American Approach) does not classify accounts into Personal, Real, and Nominal. Instead, it classifies accounts based on the accounting equation — Assets, Liabilities, Capital, Revenue, and Expenses — and applies rules based on whether the item increases or decreases.
Account Type
Increases with Dr.
Increases with Cr.
Assets
↑ Debit
↓ Credit
Liabilities
↓ Debit
↑ Credit
Capital / Owner's Equity
↓ Debit
↑ Credit
Revenue / Income
↓ Debit
↑ Credit
Expenses / Losses
↑ Debit
↓ Credit
Modern Approach Logic: Revenue increases Capital (profit) → Revenue increases with Cr (same side as Capital). Expenses decrease Capital (reduce profit) → Expenses increase with Dr (opposite to Capital). Assets are on the opposite side to Liabilities in the equation → Assets Dr when up, Liabilities Cr when up.
5. Traditional vs Modern Approach — Comparison
| Basis | Traditional (British) Approach | Modern (American) Approach |
|---|---|---|
| Classification | Personal, Real, Nominal | Assets, Liabilities, Capital, Revenue, Expenses |
| Basis | Nature of accounts (persons, assets, incomes) | Accounting Equation (A = C + L) |
| Golden Rules | 3 separate rules — one per account type | Single framework — based on increase/decrease |
| Scope | Focuses on book-keeping mechanics | Directly linked to Balance Sheet and P&L |
| Used in | CBSE / India (traditional teaching) | Modern accounting software, global standards |
| Common in CBSE? | Yes — primary approach for journal entries | Yes — for accounting equation questions |
6. Application — Journal Entry Analysis (Both Approaches)
The following table shows how each common transaction is analysed using both approaches to arrive at the correct Dr. and Cr. entries:
| Transaction | Account Debited | Type | Account Credited | Type |
|---|---|---|---|---|
| Started business with ₹5,00,000 cash | Cash A/c | Real (comes in) | Capital A/c | Personal (giver) |
| Purchased machinery ₹2,00,000 cash | Machinery A/c | Real (comes in) | Cash A/c | Real (goes out) |
| Purchased goods ₹80,000 on credit from Ram | Purchases A/c | Real (comes in) | Ram's A/c | Personal (giver) |
| Sold goods ₹1,20,000 cash | Cash A/c | Real (comes in) | Sales A/c | Nominal (income) |
| Sold goods ₹60,000 on credit to Shyam | Shyam's A/c | Personal (receiver) | Sales A/c | Nominal (income) |
| Paid salary ₹15,000 cash | Salary A/c | Nominal (expense) | Cash A/c | Real (goes out) |
| Paid rent ₹10,000 cash | Rent A/c | Nominal (expense) | Cash A/c | Real (goes out) |
| Received commission ₹8,000 cash | Cash A/c | Real (comes in) | Commission Received A/c | Nominal (income) |
| Paid to Ram (creditor) ₹80,000 | Ram's A/c | Personal (receiver of cash) | Cash A/c | Real (goes out) |
| Received from Shyam (debtor) ₹60,000 | Cash A/c | Real (comes in) | Shyam's A/c | Personal (giver of cash) |
| Bad debts written off ₹5,000 | Bad Debts A/c | Nominal (loss) | Debtor's A/c | Personal (giver) |
| Depreciation on machinery ₹20,000 | Depreciation A/c | Nominal (expense) | Machinery A/c | Real (goes out) |
| Owner withdrew cash ₹12,000 (drawings) | Drawings A/c | Personal (receiver) | Cash A/c | Real (goes out) |
7. Normal Balances of Accounts
Every account has a normal balance — the side (Dr. or Cr.) on which it typically carries its balance. This is determined by which side increases the account:
| Account Type | Examples | Normal Balance | Appears in |
|---|---|---|---|
| Asset Accounts | Cash, Machinery, Debtors, Stock, Prepaid Expense | Debit balance | Balance Sheet (Asset side) |
| Liability Accounts | Creditors, Bank Loan, Bills Payable, Outstanding Expense | Credit balance | Balance Sheet (Liability side) |
| Capital Account | Owner's Capital A/c | Credit balance | Balance Sheet (Liability side) |
| Revenue/Income Accounts | Sales A/c, Commission Received, Interest Received | Credit balance | Profit & Loss Account (Cr. side) |
| Expense/Loss Accounts | Salary, Rent, Depreciation, Bad Debts | Debit balance | Profit & Loss Account (Dr. side) |
| Drawings Account | Drawings A/c | Debit balance | Deducted from Capital in Balance Sheet |
| Purchases Account | Purchases A/c | Debit balance | Trading Account (Dr. side) |
| Sales Account | Sales A/c | Credit balance | Trading Account (Cr. side) |
⚡ Quick Recall — Chapter 6 Key Points
3 Types of Accounts: Personal (persons/firms), Real (assets — tangible & intangible), Nominal (expenses, losses, incomes, gains)
Personal Account Rule: Debit the Receiver, Credit the Giver
Real Account Rule: Debit what comes in, Credit what goes out
Nominal Account Rule: Debit all Expenses & Losses, Credit all Incomes & Gains
Modern Approach: Assets↑ Dr | Liabilities↑ Cr | Capital↑ Cr | Revenue↑ Cr | Expenses↑ Dr
Normal Balances: Assets = Dr | Liabilities = Cr | Capital = Cr | Income = Cr | Expenses = Dr
Drawings A/c = Representative Personal A/c → Debit (receiver) when cash/goods withdrawn
Capital A/c = Representative Personal A/c → Credit (giver) when owner invests
Outstanding Expenses = Representative Personal A/c → Credit (giver of unpaid service)
Goodwill, Patents, Trademarks = Intangible Real A/c → Debit when purchased (comes in)
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40 MCQs — Accounting Equation & Rules of Debit and Credit
Q 1–20: Accounting Equation | Q 21–40: Rules of Debit and Credit.
📊 Q 1–20 — Accounting Equation
20 MCQs — Accounting Equation
Mixed difficulty — conceptual, rule-based and numerical. Correct answers highlighted green with explanation.
📝 Questions 1 to 20 — Mixed Difficulty
1
The Accounting Equation is expressed as:
AAssets = Liabilities − Capital
BAssets = Capital + Liabilities
CCapital = Assets + Liabilities
DLiabilities = Assets + Capital
Answer: B — Assets = Capital + Liabilities. This is the fundamental accounting equation. Every asset owned by the business is financed either by the owner (Capital) or by outsiders (Liabilities). The equation always balances after every transaction.
2
The Accounting Equation is based on which principle?
APrudence Principle
BGoing Concern Assumption
CDual Aspect Principle
DMatching Principle
Answer: C — Dual Aspect Principle. The Accounting Equation is the mathematical expression of the Dual Aspect Principle — every transaction has two equal and opposite effects, which is why the equation always stays balanced.
3
Total Assets = ₹8,00,000 and Capital = ₹5,00,000. What are the Liabilities?
A₹13,00,000
B₹5,00,000
C₹3,00,000
D₹8,00,000
Answer: C — ₹3,00,000. Liabilities = Assets − Capital = ₹8,00,000 − ₹5,00,000 = ₹3,00,000. This is the accounting equation rearranged: L = A − C.
4
The owner starts a business by investing ₹10,00,000 cash. The effect on the accounting equation is:
AAssets increase; Liabilities increase
BAssets increase; Capital increases
CAssets increase; Liabilities decrease
DNo effect on the equation
Answer: B — Assets increase; Capital increases. Cash (Asset) ↑ ₹10,00,000 and Capital ↑ ₹10,00,000. The owner's investment creates both an asset and an equal owner's claim. Liabilities are not affected.
5
Purchased furniture for ₹50,000 cash. The effect on the accounting equation is:
AOne asset increases; another asset decreases — total assets unchanged
BTotal assets increase; Capital increases
CTotal assets increase; Liabilities increase
DAssets decrease; Capital decreases
Answer: A — Asset swap, total unchanged. Furniture (Asset) ↑ ₹50,000 and Cash (Asset) ↓ ₹50,000. Total assets remain the same. Capital and Liabilities are not affected. This is an internal/exchange transaction.
6
Goods purchased on credit from a supplier. The effect on the accounting equation is:
AAssets increase; Capital increases
BAssets decrease; Liabilities decrease
CAssets increase; Liabilities increase
DNo effect on Assets or Liabilities
Answer: C — Assets increase; Liabilities increase. Stock (Asset) ↑ and Creditors (Liability) ↑ by the same amount. Capital is not affected. Both sides of the equation increase equally — equation stays balanced.
7
The owner withdraws ₹20,000 cash for personal use. The effect on the accounting equation is:
AAssets decrease; Liabilities decrease
BAssets decrease; Liabilities increase
CAssets decrease; Capital decreases
DCapital decreases; Liabilities increase
Answer: C — Assets decrease; Capital decreases. Cash (Asset) ↓ ₹20,000 and Capital ↓ ₹20,000. Drawings are a reduction of the owner's Capital — NOT a business expense and NOT a liability. Liabilities are not affected.
8
Rent paid ₹12,000 cash. What is the effect on the accounting equation?
AAssets decrease; Liabilities decrease
BAssets decrease; Capital decreases
CAssets decrease; Liabilities increase
DCapital increases; Assets decrease
Answer: B — Assets decrease; Capital decreases. Cash (Asset) ↓ ₹12,000. Rent is an expense — it reduces profit, which reduces Capital ↓ ₹12,000. Liabilities are not affected. Same pattern as Drawings — both reduce Assets and Capital.
9
A bank loan of ₹3,00,000 is taken. The effect on the accounting equation is:
AAssets increase; Capital increases
BAssets decrease; Liabilities decrease
CAssets increase; Liabilities increase
DCapital increases; Liabilities increase
Answer: C — Assets increase; Liabilities increase. Cash/Bank (Asset) ↑ ₹3,00,000 and Bank Loan (Liability) ↑ ₹3,00,000. Capital is NOT affected — the loan comes from an outsider (bank), not the owner.
10
Cash received from a debtor in full settlement. The effect on the accounting equation is:
ATotal assets increase; Capital increases
BAssets increase; Liabilities decrease
COne asset increases; another asset decreases — total assets unchanged
DAssets decrease; Capital decreases
Answer: C — Asset swap. Cash (Asset) ↑ and Debtors (Asset) ↓ by the same amount. Total assets unchanged. Capital and Liabilities are not affected. Same pattern as buying a fixed asset for cash — both are internal transactions.
11
Goods costing ₹30,000 are sold for ₹45,000 cash. What is the net effect on Capital?
ACapital increases by ₹45,000
BCapital decreases by ₹30,000
CCapital increases by ₹15,000 (the profit)
DCapital is not affected by sales
Answer: C — Capital increases by ₹15,000. Cash ↑ ₹45,000; Stock ↓ ₹30,000. Net asset increase = ₹15,000 = Profit. Profit is added to Capital. Capital ↑ ₹15,000. Only the profit portion (not the full selling price) increases Capital.
12
Assets = ₹12,00,000; Liabilities = ₹4,00,000; Drawings during year = ₹50,000; Profit = ₹1,50,000. What was the Opening Capital?
A₹8,00,000
B₹6,50,000
C₹6,00,000
D₹9,50,000
Answer: C — ₹6,00,000. Closing Capital = Assets − Liabilities = ₹12,00,000 − ₹4,00,000 = ₹8,00,000. Closing Capital = Opening Capital + Profit − Drawings → ₹8,00,000 = Opening Capital + ₹1,50,000 − ₹50,000 → Opening Capital = ₹8,00,000 − ₹1,00,000 = ₹7,00,000. (Check: ₹7,00,000 + ₹1,50,000 − ₹50,000 = ₹8,00,000 ✓)
13
Which of the following transactions does NOT change the total of Assets?
AOwner invests fresh capital
BGoods purchased on credit
CCash received from a debtor
DLoan taken from bank
Answer: C — Cash received from debtor. Cash ↑ and Debtors ↓ by the same amount — total assets unchanged. All other options increase total assets: fresh capital (cash ↑), credit purchases (stock ↑), and bank loan (cash ↑) all add to total assets.
14
Which of the following increases BOTH Total Assets AND Total Liabilities?
AOwner introduces fresh capital
BCash sales with profit
CPayment of expenses
DPurchase of goods on credit
Answer: D — Purchase of goods on credit. Stock (Asset) ↑ and Creditors (Liability) ↑ — both sides increase. Fresh capital increases Assets and Capital. Cash sales increase Assets and Capital. Payment of expenses decreases both Assets and Capital.
15
Paid creditor ₹80,000 in cash. What is the effect on the accounting equation?
AAssets decrease; Capital decreases
BAssets increase; Liabilities decrease
CAssets decrease; Liabilities decrease
DCapital decreases; Liabilities increase
Answer: C — Assets decrease; Liabilities decrease. Cash (Asset) ↓ ₹80,000 and Creditors (Liability) ↓ ₹80,000. Capital is not affected. Both sides of the equation decrease equally — equation stays balanced.
16
The Balance Sheet is directly derived from the accounting equation because:
ABoth show profit and loss
BThe Balance Sheet is the accounting equation presented in a formal format — Assets on one side, Capital + Liabilities on the other
CBoth are prepared only at year end
DBoth use the Double Entry System
Answer: B. The Balance Sheet is simply the accounting equation in a formal presentation. Assets are shown on the right (or top in vertical format); Capital and Liabilities on the left (or bottom). Since the equation always balances, the Balance Sheet always balances too.
17
CUET: Assertion (A): The Accounting Equation always remains balanced after every transaction. Reason (R): Every transaction affects only one side of the equation.
ABoth A and R are true, and R correctly explains A
BBoth A and R are true, but R does NOT explain A
CA is true, but R is false
DBoth A and R are false
Answer: C — A is true, R is false. The equation always balances (A is correct). But the Reason is wrong — it's not because transactions affect only ONE side. The equation stays balanced because every transaction affects TWO sides equally (Dual Aspect Principle), OR changes two items within the same side equally.
18
CUET: Opening Capital ₹4,00,000; Fresh Capital introduced ₹1,00,000; Drawings ₹60,000; Closing Assets ₹9,00,000; Closing Liabilities ₹2,50,000. What is the profit or loss for the year?
AProfit ₹2,10,000
BProfit ₹2,10,000
CLoss ₹1,10,000
DProfit ₹1,50,000
Answer: B — Profit ₹2,10,000. Closing Capital = Assets − Liabilities = ₹9,00,000 − ₹2,50,000 = ₹6,50,000. Closing Capital = Opening Capital + Fresh Capital + Profit − Drawings → ₹6,50,000 = ₹4,00,000 + ₹1,00,000 + Profit − ₹60,000 → Profit = ₹6,50,000 − ₹4,40,000 = ₹2,10,000.
19
CUET: Which of the following sets of transactions will result in NO change to the total of Assets?
APayment of salary; Purchase of machinery for cash
BCash received from debtor; Purchased furniture for cash
CLoan taken; Goods sold on credit at profit
DCapital introduced; Payment to creditor
Answer: B. Both transactions in B are pure asset swaps: (1) Cash from debtor → Cash ↑, Debtors ↓ (no net change). (2) Furniture bought for cash → Furniture ↑, Cash ↓ (no net change). Option A: Salary paid reduces total assets. Option C: Loan and credit sales both increase total assets. Option D: Capital introduced increases assets; creditor payment decreases assets — net effect depends on amounts.
20
CUET: A business has Assets ₹15,00,000, Capital ₹9,00,000, Bank Loan ₹4,00,000. The owner withdraws goods worth ₹30,000 and pays outstanding salary ₹20,000 cash. What are the new values of Assets and Capital?
AAssets ₹14,50,000; Capital ₹8,50,000
BAssets ₹14,50,000; Capital ₹8,50,000
CAssets ₹14,70,000; Capital ₹8,70,000
DAssets ₹15,00,000; Capital ₹8,50,000
Answer: B — Assets ₹14,50,000; Capital ₹8,50,000. Drawings: Stock (Asset) ↓ ₹30,000, Capital ↓ ₹30,000. Salary paid: Cash (Asset) ↓ ₹20,000, Capital ↓ ₹20,000 (expense). Total: Assets = ₹15,00,000 − ₹50,000 = ₹14,50,000. Capital = ₹9,00,000 − ₹50,000 = ₹8,50,000. Bank Loan unchanged at ₹4,00,000. Verify: ₹14,50,000 = ₹8,50,000 + ₹4,00,000 + ₹2,00,000 ✓ (other liabilities ₹2,00,000 = ₹15,00,000 − ₹9,00,000 − ₹4,00,000).
⚖ Q 21–40 — Rules of Debit and Credit
20 MCQs — Rules of Debit and Credit
Mixed difficulty — covers account classification, Golden Rules, Modern Approach, and transaction analysis. Correct answers highlighted green.
📝 Questions 1 to 20 — Mixed Difficulty
21
The left side of an account is called:
ADebit side
BCredit side
CBalance side
DAsset side
Answer: A — Debit side. In any account, the left side is always the Debit (Dr.) side and the right side is always the Credit (Cr.) side. This is a fixed convention in accounting — Debit = left, Credit = right.
22
Which type of account is "Ram's Account" (a customer)?
AReal Account
BPersonal Account
CNominal Account
DRepresentative Account
Answer: B — Personal Account. Ram is an individual (natural person) — his account is a Natural Personal Account. The Golden Rule: Debit the Receiver, Credit the Giver applies to this account.
23
Machinery Account is classified as:
APersonal Account
BNominal Account
CReal Account — Tangible
DReal Account — Intangible
Answer: C — Real Account (Tangible). Machinery is a physical asset you can touch and see — it is a Tangible Real Account. The Golden Rule: Debit what comes in, Credit what goes out applies. Machinery A/c is Debited when purchased.
24
Salary Account is an example of:
AReal Account
BPersonal Account
CNominal Account
DRepresentative Personal Account
Answer: C — Nominal Account. Salary is an expense — it has no physical existence and is closed at year end by transferring to P&L Account. Golden Rule: Debit all expenses and losses. Salary A/c is always Debited.
25
The Golden Rule for a Real Account is:
ADebit the Receiver; Credit the Giver
BDebit all Expenses; Credit all Incomes
CDebit what comes in; Credit what goes out
DDebit all Incomes; Credit all Expenses
Answer: C — Debit what comes in; Credit what goes out. The Real Account Golden Rule applies to all asset accounts. When an asset enters the business it is Debited; when it leaves, it is Credited. Example: Cash comes in → Cash A/c Dr.
26
The Golden Rule for a Nominal Account is:
ADebit the Receiver; Credit the Giver
BDebit what comes in; Credit what goes out
CDebit all Expenses and Losses; Credit all Incomes and Gains
DDebit all Liabilities; Credit all Assets
Answer: C — Debit all Expenses and Losses; Credit all Incomes and Gains. Nominal Account rule applies to all revenue and expense accounts. Rent (expense) is Debited; Commission Received (income) is Credited.
27
Goodwill Account is classified as:
ANominal Account
BPersonal Account
CReal Account — Tangible
DReal Account — Intangible
Answer: D — Real Account (Intangible). Goodwill has monetary value but no physical existence — it is an Intangible Real Account. Golden Rule: Debit what comes in. Goodwill A/c is Debited when purchased. (Do NOT confuse with Nominal — Goodwill is an asset, not an income/expense.)
28
Outstanding Salary Account is a:
AReal Account
BNominal Account
CNatural Personal Account
DRepresentative Personal Account
Answer: D — Representative Personal Account. Outstanding Salary A/c represents the employees who are owed salary — it stands in place of a personal account for unpaid employees. It has a Credit balance (liability). Golden Rule: Debit the Receiver, Credit the Giver applies.
29
When cash is received from Shyam (debtor), which entry is passed?
AShyam A/c Dr; Sales A/c Cr
BCash A/c Dr; Shyam A/c Cr
CShyam A/c Dr; Cash A/c Cr
DCash A/c Dr; Capital A/c Cr
Answer: B — Cash A/c Dr; Shyam A/c Cr. Cash comes in → Cash A/c Dr (Real — comes in). Shyam is giving cash → Shyam A/c Cr (Personal — Giver). The debt is now cleared so Shyam's account is credited to close it.
30
Rent paid in cash ₹10,000. The journal entry is:
ACash A/c Dr; Rent A/c Cr
BCapital A/c Dr; Rent A/c Cr
CRent A/c Dr; Cash A/c Cr
DRent A/c Dr; Capital A/c Cr
Answer: C — Rent A/c Dr; Cash A/c Cr. Rent is an expense → Rent A/c Dr (Nominal — all expenses Dr). Cash goes out → Cash A/c Cr (Real — goes out). This is the standard entry for any expense paid in cash.
31
Goods purchased on credit from Ramesh. The account to be credited is:
APurchases A/c
BCash A/c
CRamesh A/c
DSales A/c
Answer: C — Ramesh A/c. Ramesh is the giver of goods (the supplier) → Ramesh A/c Cr (Personal — Giver). Purchases A/c Dr (Real — goods come in). Ramesh's account is Credited because the business owes him money.
32
Under the Modern Approach, which account is Credited when it INCREASES?
AAsset Account
BExpense Account
CLiability Account
DDrawings Account
Answer: C — Liability Account. Under the Modern Approach: Liabilities increase with Credit. Assets increase with Debit. Expenses increase with Debit. Drawings increase with Debit (reduces Capital). Revenue and Capital increase with Credit.
33
Capital Account has a normal balance of:
ADebit balance
BCredit balance
CZero balance
DEither Debit or Credit
Answer: B — Credit balance. Capital Account normally has a Credit balance — it represents the owner's claim (liability of business to owner). Capital increases with Credit (investment, profit) and decreases with Debit (drawings, losses).
34
Owner withdrew goods worth ₹5,000 for personal use. The journal entry is:
ASales A/c Dr; Purchases A/c Cr
BCash A/c Dr; Capital A/c Cr
CDrawings A/c Dr; Purchases A/c Cr
DDrawings A/c Dr; Sales A/c Cr
Answer: C — Drawings A/c Dr; Purchases A/c Cr. Drawings A/c Dr (Personal — owner is the receiver). Purchases A/c Cr (Real — goods go out at cost price). Sales A/c is not credited because goods are NOT sold — they are withdrawn by the owner. Always at cost price.
35
Commission Received Account has a normal balance of:
ACredit balance
BDebit balance
CZero balance always
DDebit balance if income exceeds expenses
Answer: A — Credit balance. Commission Received is income — all income accounts have a Credit normal balance (Nominal Account rule: incomes are Credited). At year end, this Credit balance is transferred to the Profit & Loss Account.
36
SBI Bank Account (current account of the business) is classified as:
ANatural Personal Account
BArtificial Personal Account
CReal Account
DNominal Account
Answer: B — Artificial Personal Account. SBI is a legal entity (a bank — not a natural person) — it is an Artificial Personal Account. The same Golden Rule applies: Debit the Receiver (SBI receives our deposit → SBI Dr), Credit the Giver (SBI gives us cash → SBI Cr).
37
CUET: Assertion (A): Goodwill Account is a Nominal Account. Reason (R): Goodwill has no physical existence.
ABoth A and R are true, and R correctly explains A
BBoth A and R are true, but R does NOT explain A
CA is false; R is true
DBoth A and R are false
Answer: C — A is false; R is true. Goodwill has no physical existence (R is true) — but that does NOT make it a Nominal Account. Goodwill is an Intangible Real Account (an asset). Nominal accounts are expenses and incomes — they have no physical existence either, but they are NOT assets. The correct classification of Goodwill is Real Account (Intangible).
38
CUET: A business purchases a patent for ₹3,00,000 cash. Identify the CORRECT journal entry and account types.
APatent A/c Dr (Nominal); Cash A/c Cr (Real)
BPatent A/c Dr (Real — Intangible, comes in); Cash A/c Cr (Real — goes out)
CPatent A/c Dr (Personal); Cash A/c Cr (Real)
DExpense A/c Dr (Nominal); Cash A/c Cr (Real)
Answer: B — Patent A/c Dr (Intangible Real); Cash A/c Cr (Real). Patent is an Intangible Real Account (asset — no physical form but has monetary value). Real Rule: Debit what comes in → Patent comes in → Patent A/c Dr. Cash goes out → Cash A/c Cr. A patent is NOT a nominal account (it is an asset, not an expense).
39
CUET: Under both the Traditional and Modern approaches, which account is always DEBITED when salary is paid in cash?
ACash A/c (Traditional: Real; Modern: Asset)
BCapital A/c
CSalary A/c (Traditional: Nominal — expense; Modern: Expense account)
DOutstanding Salary A/c
Answer: C — Salary A/c Debited under both approaches. Traditional: Salary is a Nominal Account (expense) → Debit all expenses. Modern: Salary is an Expense account → Expenses increase with Debit. Both approaches agree: Salary A/c Dr, Cash A/c Cr. The approaches classify accounts differently but arrive at the same journal entry.
40
CUET: Which of the following correctly identifies the account type AND its normal balance?
ARent A/c — Real Account — Debit balance
BCreditors A/c — Real Account — Credit balance
CGoodwill A/c — Nominal Account — Credit balance
DCash A/c — Real Account — Debit balance
Answer: D — Cash A/c is a Real Account with a Debit normal balance. Option A wrong: Rent is Nominal (not Real). Option B wrong: Creditors is Personal (not Real). Option C wrong: Goodwill is Real-Intangible (not Nominal) and has a Debit balance (asset). Option D correct: Cash is a Tangible Real Account and always has a Debit normal balance (asset).
Chapter 5 — Live Quiz (40 Questions)
40 questions · Accounting Equation + Debit & Credit · One at a time · Instant feedback
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