Effect Of Cash Paid For Expenses On Owner’s Equity In Accounting Equation

How Is Owner’s Equity Affected When Cash / Check Is Paid For Expenses Or The Effect Of Expenses Paid For Cash / Check On Owner’s Equity In Accounting Equation

When Expenses paid for cash or by cheque / check, then we debit relevant expense accounts and credit cash account or credit bank account if expenses paid by cheque / check.

The journal entry to record for expenses paid for cash or bank is shown below:

                                                               Expense Paid a/c  XXX

 

                                                                                               Cash a/c / Bank a/c  XXX

 

                                                                 (Expenses Paid For Cash / Bank)

For Example, Mr. A, as a sole proprietor paid rent expenses of Rs. 20000 for cash, then the journal entry to record is shown below:

                                                                     Rent Expenses a/c  20000

 

                                                                                                     Cash a/c  20000

 

                                                                         (Rent Expenses Paid For Cash)

 

As the rent expenses are incurred, so we debit these. Cash is going out of the business, so it is decreasing, so we credit it according to rules of debit and credit.

The Effect Of Expenses Paid On Accounting Equation

The effect of rent expenses paid for cash on Owner’s Equity in Accounting Equation is shown below:

                                                Assets =   Liabilities   +   Owner’s Equity

                                                      -Cash  =    Liabilities    +   (-Rent Expenses)

                                                     -20000 =           0           +           (-2000)

Cash is decreasing as a current asset on the left side of the accounting equation, so we deduct it from assets. As rent expenses are the results of operations of the business and these are incurred to run the business operations so that the business may earn the revenue in future, so these have unfavorable effect on owner’s equity in the accounting equation on the right side, so these are deducted from owner’s equity.