LESSON 2 : ACCOUNTING EQUATION

ACCOUNTING EQUATION (A = L + OE)

Which of the following correctly sets out the accounting equation:

Net assets = Capital + Profits – Drawings

Which of the following correctly describes an asset?

An asset is something a business controls

Which of the following should be classified as assets?

Motor vehicles

Which of the following correctly describes a liability?

An amount owed by the business

A furniture shop owner buys a computer on credit.

5. What is the effect of this transaction?

Increase assets, increase liabilities

Louise introduces her car into her business.

6. Which parts of the business' accounting equation will change?

Assets and capital

Clara is the sole proprietor of CZC Ltd. She brings a refrigerator into the business for employees

to store their food and drinks.

7. Which element of the accounting equation will change due to this transaction?

Assets and Capital

A business has total assets of $50,000 and capital of $7,000.

8. What are the values of liabilities and net assets?

Liabilities $43,000, Net assets $7,000

A business has non-current assets of $26,000, total liabilities of $32,000 and capital of $8,500.

9. What is the value of current assets?

$14,500

A business receives a telephone bill for $500. The bill is unpaid.

10. Which of the following statements correctly shows the effect upon the accounting equation of

the business?

Capital decreases, liabilities increase

A business has an overdraft of $3,600. The owner of the business takes $1,000 cash from the

bank for living expenses.

11. Which part of the business’s accounting equation will be affected by this?

Capital and assets

Bo sets up his own accounting consultancy from home. He buys a laptop for $3,000 and puts

$2,000 into a business bank account. In the first month, he invoices a client for $2,500 and it is

not due yet for payment. He pays $700 to a part-time account assistant.

12. What is Bo’s capital balance at the end of the month?

6,800

13. Which of the following should be classified as liabilities?

(i) Trade receivables

(ii) Sales tax payable

(iii) Trade payables

(iv) Drawings

(ii)Sales tax payable and (iii)Trade payables only

Which of the following summaries is correct?

Capital Assets Liabilities

$25,000 $33,000 $8,000

Annabel has started a new business with $20,000 in cash, which she raised using a personal loan

from the bank. She also transferred her personal car worth $15,000 into the new business.

15. Which elements of the accounting equation would be affected by this initial transaction?

Assets and capital

Which formula correctly represents the Accounting Equation?

Assets − Liabili􀆟es = Capital Invested − Drawings + Income – Expenditure

Which of the following statements best explains the accounting equation?

The accounting equation demonstrate the effect of a transaction upon the assets, liabilities

and proprietor’s capital of a business.

Which elements of the financial statements are summarised and classified in the statement of

profit or loss?

Income and expenses

Which statement provides the definition of a statement of profit or loss?

A statement that presents a summary of the income and expenses of a business for a period

of time.

Which transaction leads to a change in the capital of a business?

Profit earned from trading

Which causes a change in the net assets of a business?

Sales of trading goods at a profit.

Which of the following would be classified as expense charged to profit or loss?

Annual insurance for the building

Which of the following would be classified as an expense charged to profit or loss?

The road fund license

What is the effect upon net assets when an expense is paid in cash?

Net assets decrease and profit decreases

Which of the following statements is true?

Purchase of a salesman’s car is asset expenditure and repairs to a delivery van are expenses.

Which of the following correctly records the repayment of a loan of $16,000 plus outstanding

interest $600?

Assets – $16,600, Liabilities – $16,000, Expenses + $600

A sole trader took goods valued at $2,000 from inventory for his own use. The selling price of

the goods is $2,800.

12. What would be the journal entry to correctly record this?

DR Drawings: $2,000, CR Purchases: $2,000

A business buys a machine for $500 and pays machinery insurance $50, payment is made at the

same time as the transaction.

13. Which of the following shows the correct double entry for this transaction?

Debit machinery $500, credit bank general ledger account $550, debit insurance $50

Which of the following appears in the statement of profit or loss and other comprehensive

income for the year ended 31 December 20X6?

$5,000 cost to repair a machine that broke down in the year

Clarence's business has net assets of $24,650 at the beginning of the year. During the following

month, he purchases new equipment for $6,500, makes sales on credit of $18,400, receives

payments from customers of $10,750 and receives bills from suppliers of $7,980. These are not

payable until next month.

15. What are the net assets at the end of the month?

$30,820