Question 1 of 7intermediate💡 UnderstandShort Answer2 marks

State different kinds of transactions that increase and decrease capital.

Correct Answer

Transactions that increase capital include:

  1. Fresh capital introduced by the owner (e.g., bringing cash or stock into the business).
  2. Revenues and Gains (Income) earned by the business, which result in a profit.

Transactions that decrease capital include:

  1. Expenses and Losses incurred by the business (costs required to run the business).
  2. Drawings (withdrawals of money or assets by the owner for personal use).
Exercise: Test Your Understanding - I | Q: 2
For More Understanding

Explanation

The provided context outlines the rules of debit and credit, establishing that an increase in capital is credited while a decrease is debited. It explicitly mentions 'Fresh capital introduced' as a capital account item. It links 'Revenues/Gains' to capital increases (credit) and 'Expenses/Losses' to capital decreases (debit) through the accounting rules chart. Additionally, 'Drawings' is listed among the commonly used accounts in the classification exercise, which represents a withdrawal of funds reducing the owner's capital.

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