Chapter 3: Elements of Accounting Equation

Question 1

State the accounting equation and the expanded accounting equation.

Answer 1

Assets = Liabilities + Equity

Assets = Liabilities + Income – Expenses + Capital – Drawings

Question 2

Explain Assets.

Answer 2

Assets - Resources a business owns or controls that are expected to provide future benefits.

Question 3

Explain liability.

Answer 3

Obligations owed by a business to others that are expected to be settled in the future

Question 4

Explain equity

Answer 4

Claim by the owner on the net assets of the business.

Question 5

Explain income.

Answer 5

Amounts earned through activities of a business

Question 6

Explain expense.

Answer 6

Cost incurred in the operation of business to earn the income in the same accounting period.

Question 7

Give examples of assets

Answer 7

Assets
Cash at bank
Cash in hand
Trade receivables
Inventory
Fixtures and fittings
Motor vehicle
Office equipment

Question 8

Give examples of liabilities.

Answer 8

Trade payable
Loan from bank
Bank overdraft

Question 9

Give examples of equity

Answer 9

Capital
Drawings

Question 10

Give examples of income

Answer 10

Sales revenue
Rent income

Question 11

Expenses

Answer 11

Cost of sales
Utilities expense

Question 12

Using the accounting equation, calculate the equity.

Cash in hand $3 000 Trade payables $5 000 Trade receivables $10 000
Motor vehicles $25 000 Bank loan $12 000 Cash at bank $15 000

Find the equity using the accounting equation.

Answer 12

Assets = Liabilities + Equity

Equity = Assets – Liabilities

Total Assets
=3,000 + 25,000 + 10,000 + 15,000
= $53 000

Total Liabilities
=5,000 + 12,000 = $17 000

Equity = $53 000 - $17 000 = $36 000