The Accounting Equation

Question 1

What is the Accounting Equation?

Answer 1

Assets = Owner’s Equity + Liabilities
A = OE + L
Can be rearranged: A-L = OE

Question 2

What is the accounting statement which shows a summary of the accounting equation?

Answer 2

The Statement of Financial Position (SoFP), also know as the Balance Sheet

Question 3

If an owner puts their own money into the business, £1000, show the effect on the accounting equation?

Answer 3

Assets (bank) increases £1000. Owner’s equity (capital) increases £1000. Increase in A = Increase in OE
+£1000 = +£1000

Question 4

Give 5 examples of current assets. (hint: current means that they are cash or can/will be converted to cash within a year).

Answer 4

Stock, Bank, Petty Cash, Float, Accounts Receivable.

Question 5

Give 3 other names for Stock

Answer 5

Inventory, Merchandise, Goods.

Question 6

Give 5 examples of non-current assets. (hint: the business will use these assets over more than a year)

Answer 6

Vehicles, Machinery, Equipment, Land & Buildings (could also be called premises), Furniture and fittings.

Question 7

What are the two categories of funding a business?

Answer 7

Owner’s funds or Liabilities (borrowed funds for example a loan).

Question 8

The business buys a delivery vehicle, £300 and pays with money drawn from the bank account. Show the effect on the balance sheet/ accounting equation?

Answer 8

Assets (vehicles) increase £300. Assets (bank) decreases £300.
+&- £300 = 0

Question 9

If your customer buys goods for you does not pay immediately, where does their debt to you go in the balance sheet?

Answer 9

Accounts receivable (because you are still waiting to receive the money from your customer, who is also called a debtor as they are in debt to you).

Question 10

Where are supplier’s balances shown in the balance sheet?

Answer 10

Accounts payable (because you still need to pay).

Question 11

Another name for supplier?

Answer 11

Creditor

Question 12

Another name for customer?

Answer 12

Debtor

Question 13

The business buys a property for £1m and takes out a loan to pay for it. Show the effect on the accounting equation/ balance sheet.

Answer 13

Assets (Land & Buildings) increases £1m, Liabilities (loan) increase £1m.
+£1m = +£1m

Question 14

The business pays off £1500 of the loan. Show the effect on the accounting equation / balance sheet.

Answer 14

Assets (bank) decrease £1500, Liabilities (loan) decreases £1500. Explanation: you took money out of your bank account therefore it decreased and you paid off part of the loan, therefore the loan also decreased.
-£1500 = -£1500

Question 15

Is it possible for the Bank be an asset and a liability?

Answer 15

Yes, but not at the same time. If there is money in your account it is an asset. If you have taken out too much money and gone into overdraft then it is a liability as you owe the bank.

Question 16

A customer pays £20 off the amount he owes. Show the effect on the accounting equation.

Answer 16

Asset (bank) increases £20. Asset (Accounts receivable) decreases £20.
+&- £20= 0

Question 17

What accounts would you find in the Owner’s Equity section of the balance sheet if the enterprise is a Sole Trader?

Answer 17

Capital, Drawings, Net Profit.

Question 18

What accounts would you find in the Owner’s Equity section of the balance sheet if the enterprise is a Company (public or private)?

Answer 18

Shares, Retained income.

Question 19

What do shareholders receive in return for their investment?

Answer 19

Dividends

Question 20

What do sole traders receive in return for their investment in their own business?

Answer 20

The net profit for the year belongs to them, the net profit is then part of Owner’s Equity.

Question 21

What is a T-account?

Answer 21

A general ledger account. This shows all the debits and credits for a particular account.

Question 22

In the General Ledger (or T account), on which side

do Assets increase?

Answer 22

Assets increase on the DEBIT side.

Extra information: Debit side is on the left of the T

Question 23

In the General Ledger (or T account), on which side do Liabilities increase?

Answer 23

Liabilities increase on the CREDIT side.

Extra information: Credit side is on the right of the T

Question 24

In the General Ledger (or T account), on which side does Owner’s Equity increase?

Answer 24

Owner’s Equity increases on the CREDIT side.

Extra information: Credit side is on the right of the T