Accounting Equation and Double Entry

Question 1

What are the products of financial transactions?

Answer 1

The profit and loss account and balance sheet (SOFP)

Question 2

What system do we need for recording business transactions?

Answer 2

Double entry book-keeping

Question 3

What does ‘principal of duality’ mean?

Answer 3

Every transaction has two opposite and equal sides, each transaction will change or affect the components of the financial statements

Question 4

What is based on the accounting equation?

Answer 4

Double entry book-keeping

Question 5

What does Assets = Liabilities mean?

Answer 5

Every asset belongs to a third party (e.g. bank) or the owner

Question 6

Why do we use Assets = Liabilities + Capital?

Answer 6

To distinguish between 3rd party liabilities and liability to owner

Question 7

What happens in an accounting period?

Answer 7

You make a profit or loss

Question 8

How can we calculate profit?

Answer 8

Income - Expenses = Profit

Question 9

What does profit increase?

Answer 9

It increases the amount the owner is owed (they get amount invested plus profits made)

Question 10

What happens if a profit is made?

Answer 10

Then income has become more than expenses, which means corresponding increase in assets so the equation balances

Question 11

What is the full accounting equation before rearranged?

Answer 11

Assets = Liabilities + Capital + (Income - Expenses)

Question 12

What is the full accounting equation after rearranged?

Answer 12

Assets + Expenses = Liabilities + Capital + Income

Question 13

Why do we rearrange the accounting equation?

Answer 13

Because some types of accounts have debit balances and some types of accounts have credit balances

Question 14

What is the aim of the duality principle?

Answer 14

To get total debits to balance with total credits

Question 15

Are asset and expense accounts debit or credit balances?

Answer 15

Debit balances

Question 16

Are liabilities, income and capital accounts debit or credit balances?

Answer 16

Credit balances

Question 17

What are total debits?

Answer 17

Assets + Expenses

Question 18

What are total credits?

Answer 18

Liabilities + Capital + Income

Question 19

What is double entry book-keeping?

Answer 19

It systematically records financial transactions, every transaction has two entries (debit and credit entry)

Question 20

What happens if a transaction increases assets or expenses?

Answer 20

Debit them - more of a debit balance

Question 21

What happens if a transaction decreases assets or expenses?

Answer 21

Credit them - less of a debit balance

Question 22

What happens if a transaction increases liabilities, income or capital?

Answer 22

Credit them - more of a credit balance

Question 23

What happens if a transaction decreases liabilities, income or capital?

Answer 23

Debit them - less of a credit balance

Question 24

How can we record transactions?

Answer 24

Using T accounts or columns