Correct Option: B
Explanation of the Correct Answer:
When Mr. Diamond started the 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 increase in the owner's equity in the business. Since Mr. Diamond is investing N500,000 into the business, we credit the Capital account with N500,000.
Thus, the correct journal entry for this transaction is:
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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 Incorrect:
- 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 instead to reflect the increase in owner's equity.
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Option C: "Bank account was accredited with N500,000."
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Why it's wrong: This option states that the Bank account is "accredited," which is a misstatement. The correct term is "credited," but even if we assume it meant credited, it fails to mention the corresponding debit to the Capital account. A complete entry must include both sides of the transaction.
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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 refers to "Mr. Diamond account," which is not a standard account in this context. The transaction does not involve debiting Mr. Diamond's personal account; instead, it should reflect the business's accounts. 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.
- Misunderstanding the accounts involved (like confusing cash with bank deposits) can lead to incorrect entries.
- Always ensure that the terminology used in accounting is precise to avoid confusion.
This thorough understanding of the transaction and the accounts involved will help you accurately record similar transactions in the future.