Correct Option: B
Explanation of the Correct Answer:
When Mr. Diamond started his business by bringing in a cheque of N500,000, this transaction involves two main accounts: the Bank account and the Capital account.
- Understanding the Accounts:
- Bank Account: This account represents the money that the business has in its bank. When Mr. Diamond deposits the cheque, the business's bank account increases.
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Capital Account: This account reflects the owner's investment in the business. When Mr. Diamond invests N500,000, it increases the capital of the business.
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Recording the Transaction:
- In double-entry accounting, every transaction affects at least two accounts. The basic principle is that for every debit entry, there must be a corresponding credit entry of equal value.
- In this case:
- Debit the Bank Account: This reflects the increase in cash (or bank balance) due to the cheque deposit. Therefore, we debit the Bank account with N500,000.
- Credit the Capital Account: This reflects the owner's investment in the business. Since Mr. Diamond is investing N500,000, we credit the Capital account with N500,000.
Thus, the journal entry for this transaction would be:
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Debit: Bank Account N500,000
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Credit: Capital Account N500,000
This is why option B is correct.
Why the Other Options are Wrong:
- Option A: "Cash account was credited with N500,000 and capital account was debited with N500,000."
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Why it's wrong: This option incorrectly credits the Cash account instead of the Bank account. In this scenario, the cheque is deposited into the bank, not cash. Additionally, it incorrectly debits the Capital account, which should be credited to reflect the owner's investment.
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Option C: "Bank account was accredited with N500,000."
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Why it's wrong: This option uses the term "accredited," which is not a standard accounting term. The correct term is "credited." Moreover, it fails to mention the corresponding debit to the Capital account, which is essential for proper double-entry bookkeeping.
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Option D: "Mr. Diamond account was debited with N500,000 and the cheque account was credited with N500,000."
- Why it's wrong: This option incorrectly references a "Mr. Diamond account," which is not standard in this context. The transaction should reflect the increase in the Bank account and the Capital account, not a personal account for Mr. Diamond. Additionally, there is no "cheque account" in this context; the cheque is simply a means of transferring funds to the Bank account.
Summary of Key Points:
- The correct entry for Mr. Diamond's investment is to debit the Bank account and credit the Capital account.
- Double-entry accounting requires that every transaction affects at least two accounts with equal debits and credits.
- Understanding the nature of accounts (assets vs. equity) is crucial for accurate recording.
- Always use standard accounting terminology to avoid confusion in entries.