Chapter 12: Balance Sheet Equation (JAIIB – Paper 3)

1. Which of the following represents the Balance Sheet Equation?

• A. Assets = Revenue + Liabilities
• B. Assets = Liabilities – Equity
• C. Assets = Liabilities + Equity
• D. Assets = Capital – Liabilities

The Balance Sheet Equation is: Assets = Liabilities + Owner’s Equity. It shows that all assets are financed either through debt or equity.

2. If a bank lends ₹1,00,000 to a customer, how will the balance sheet equation be affected?

• A. Assets ↑ ₹1,00,000 and Liabilities ↑ ₹1,00,000
• B. Assets ↑ ₹1,00,000 and Equity ↑ ₹1,00,000
• C. Liabilities ↓ ₹1,00,000 and Assets ↑ ₹1,00,000
• D. No impact on balance sheet equation

When a loan is given, the bank’s assets (loan) increase and simultaneously its liabilities (customer deposit) increase by the same amount.

3. Owner’s Equity is equal to:

• A. Assets – Expenses
• B. Liabilities – Assets
• C. Assets + Liabilities
• D. Assets – Liabilities

Owner’s Equity (or Capital) = Assets – Liabilities. It represents the residual interest in the assets after deducting liabilities.

4. Which of the following transactions will not affect the balance sheet equation?

• A. Purchase of machinery by paying cash
• B. Payment of salary to employees
• C. Cash received from debtors
• D. Fresh capital introduced by owner

Cash received from debtors only changes the form of assets (Debtors ↓, Cash ↑), hence no change in total Assets, Liabilities, or Equity.

5. A business has Assets of ₹15,00,000 and Liabilities of ₹9,00,000. What will be the Owner’s Equity?

• A. ₹6,00,000
• B. ₹24,00,000
• C. ₹9,00,000
• D. ₹15,00,000

Owner’s Equity = Assets – Liabilities = ₹15,00,000 – ₹9,00,000 = ₹6,00,000.

Caselet: A new branch of XYZ Bank started operations with Owner’s Capital of ₹5,00,000. During the first week: - The bank received deposits of ₹3,00,000 from customers. - It sanctioned a loan of ₹2,00,000 to a borrower. - It purchased furniture worth ₹50,000 by paying cash.

Q6. What will be the total Assets after the above transactions?

• A. ₹7,50,000
• B. ₹5,50,000
• C. ₹10,50,000
• D. ₹8,00,000

Assets = Cash + Loan + Furniture. Initial Capital ₹5,00,000 (Cash) + Deposits received ₹3,00,000 (Cash ↑) = ₹8,00,000. Loan sanctioned = ₹2,00,000 (Asset ↑). Furniture purchased = ₹50,000 (Cash ↓, Furniture ↑ → no net effect). Total Assets = ₹8,00,000 + ₹2,00,000 + ₹50,000 = ₹10,50,000.

Q7. Based on the same caselet, what will be the Owner’s Equity at the end of these transactions?

• A. ₹5,00,000
• B. ₹7,00,000
• C. ₹8,00,000
• D. ₹10,50,000

Owner’s Equity = Initial Capital + Profits/Reserves. Here, only capital of ₹5,00,000 was introduced. No income/expense was recorded in the given transactions. Therefore, Equity remains ₹5,00,000.

8. A business has Assets of ₹12,00,000 and Owner’s Equity of ₹4,50,000. What will be the Liabilities?

• A. ₹16,50,000
• B. ₹7,50,000
• C. ₹4,50,000
• D. ₹7,50,000

Balance Sheet Equation: Assets = Liabilities + Equity. Liabilities = Assets – Equity = ₹12,00,000 – ₹4,50,000 = ₹7,50,000.

9. A firm purchased goods worth ₹1,00,000 on credit. What will be the impact on Balance Sheet Equation?

• A. Assets decrease ₹1,00,000; Liabilities increase ₹1,00,000
• B. Assets increase ₹1,00,000; Liabilities increase ₹1,00,000
• C. Assets increase ₹1,00,000; Equity increase ₹1,00,000
• D. No change in Balance Sheet

Purchase on credit increases stock (Asset) by ₹1,00,000 and also creates Creditors (Liability) of ₹1,00,000.

10. A business started with cash ₹2,00,000. Later it borrowed ₹1,00,000 from bank and purchased machinery for ₹1,50,000. What is the balance sheet equation now?

• A. Assets ₹3,00,000; Liabilities ₹1,00,000; Equity ₹2,00,000
• B. Assets ₹3,50,000; Liabilities ₹1,00,000; Equity ₹2,50,000
• C. Assets ₹3,00,000; Liabilities ₹1,00,000; Equity ₹2,00,000
• D. Assets ₹2,50,000; Liabilities ₹1,50,000; Equity ₹1,00,000

Initial Capital (Equity) = ₹2,00,000. Borrowed Loan = ₹1,00,000 (Liability). Assets = Cash ₹50,000 (after machinery purchase) + Machinery ₹1,50,000 + Loan to business ₹1,00,000 = ₹3,00,000. Hence, Assets ₹3,00,000 = Liabilities ₹1,00,000 + Equity ₹2,00,000.