ACCT 1A&B: Fundamentals of Accounting

BCSV

Fundamentals of Accounting I
The Accounting Equation

I. Conceptual skills

A. Morse type
Write: A If both statements are true.
B If both statements are false.
C If only the 1st statement is true.
D If only the 2nd statement is true.

1. Statement 1: An account has two sides, debit and credit.

Statement 2: The debit is only left-hand side and the credit is on the right-hand side of
the reader facing the account.

2. Statement 1: Debit which means value received includes assets and does not include
expenses.
Statement 2: Credit represents increases in revenue, capital, and expenses.

3. Statement 1: There is no effect in the amounts of the accounting equation if an asset is

changed into another form of asset.
Statement 2: The difference between total debits and credits in the accounts is called the
account balance which results in an open account.

4. Statement 1: A personal drawing is normally a credit balance in the business records.

Statement 2: The normal balance of an account payable is a debit amount.

5. Statement 1: To increase the amount of liability, the liability accounts should be credited.
Statement 2: Increases in asset mean increases in liabilities but not increases in capital.

6. Statement 1: The assets are on the left hand side of the accounting equation, and the
liabilities and capital are on the right hand side of the equation.
Statement 2: The total value of credits in most cases is higher than the total value of
debits.

7. Statement 1: Assets are normally on the credit side of the accounting equation.
Statement 2: In the expanded accounting equation, revenue increases the owner’s equity
account.

8. Statement 1: If revenue exceeds expenses, this will result into loss.

Statement 2: Assets is equal to Liabilities plus Equity.

9. Statement 1: Credit is not always equal to debit in an accounting equation.

Statement 2: Debit is the value parted with in a business transaction.

10. Statement 1: The dual aspect concept states that for every change in financial
transaction, there would always be a two-sided effect to the extent of the
same amount recorded in the books of accounts.
Statement 2: Owners have priority of claims against the business assets.

B. Multiple Choice
Choose the letter of the best answer.

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1. Which of the following is not a correct accounting equation?

A. Assets – Liabilities = Owner’s Equity
B. Assets = Liabilities – Owner’s Equity
C. Liabilities = Assets – Owner’s Equity
D. All of the above
E. None of the above

2. One of the following does not report correctly the performance of the business. Which is it?
A. Expenses > Revenue = Profit
B. Revenue < Expenses = Loss
C. Profit = Revenue > Expenses
D. Loss = Revenue < Expenses

3. Which of the following will decrease the capital account?

A. Initial investments
B. Net income
C. Purchase of machine for business use.
D. Expenses

4. One of the items is not an item of cash disbursements.

A. Payment of business expense
B. Long-term borrowings
C. Owner’s drawings
D. Purchase of assets

5. A company issued a P 200,000 promissory note for cash loan received from a bank. This
transaction will result into
A. Increase in owner’s equity
B. Decrease in assets
C. Increase in liabilities
D. Increase in assets
E. Choices C and D are correct

6. The accounting equation should remain in balance because every transaction affects how many
accounts?
A. Only one
B. Only two
C. Two or more
D. None

7. If the business assets are increased by P 150,000 and the liabilities are also increased by the
same amount, the change in owner’s capital would be
A. Increased by P 300,000
B. Increased by P 150,000
C. Decreased by P 150,000
D. No effect

8. If the business assets are increased by P 150,000 and the liabilities are decreased by the same
amount, the change in owner’s capital would be
A. Increased by P 300,000
B. Increased by P 150,000
C. Decreased by P 150,000
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D. No effect

9. Which of the following will cause owner's equity to increase?

A. Initial investments
B. Owner’s drawings
C. Expenses
D. Losses

10. The financial statement with a structure that is similar to the accounting equation is the
_________.
A. Statement of Comprehensive Income
B. Statement of Cash Flows
C. Statement of Financial Position
D. Balance Sheet
E. Choices C and D are correct

C. Identification of the effects on the accounting equation

For each of the transactions, indicate the two (or more) effects on the accounting equation of the
business or company.

1. The owner withdraws cash from the business for personal use.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

2. The company repays the bank that had lent money to the company.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

3. The company purchases a significant amount of supplies on credit.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

4. The company purchases land by paying half in cash and signing a note payable for the other
half.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

5. The owner contributes his/her personal truck to the business.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

6. The company receives cash from a bank loan.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

Use the following information for items 7 – 10:

Company XYZ provides consulting services to Client QOP in May. Company XYZ bills Client QOP in May
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for the agreed upon amount of P 5,000. The sales invoice shows that the amount will be due in June.

7. In May, Company XYZ records the transaction by a debit to Accounts Receivable for P 5,000
and a credit to Service Revenues for P 5,000. What is the effect of this entry upon the
accounting equation for Company XYZ?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

8. In June, Company XYZ receives the P 5,000. What is the effect on the accounting
equation and which accounts are affected at Company XYZ?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

9. What is the effect on Client QOP's accounting equation in May when Client QOP records the
transaction as a debit to Consultant Expense for P5,000 and a credit to Accounts Payable for
P5,000?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

10. What is the effect on Client QOP's accounting equation in June when Client QOP remits the
P5,000? Also, which accounts will be involved?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

II. Computational and Analytical skills

Supply what is asked.

Problem 1:
Case 1: Case 2: Case 3: Case 4: Case 5:
Assets ? 120,000 250,000 ? 300,000
Liabilities 50,000 40,000 ? ? 35%
Owner’s equity 75,000 ? 140,000 60% ?

Problem 2:
Case 1: Case 2: Case 3: Case 4: Case 5:
Revenues 150,000 175,000 ? 190,000 ?
Expenses 80,000 ? 130,000 ? 150,000
Profit/Loss ? 50,000 (40,000) (25,000) 62.5%

Problem 3:
Case 1: Case 2: Case 3:* Case 4: Case 5:
Beginning capital 100,000 90,000 120,000 146,000 ?
Additional investment 20,000 10,000 30,000 ? 50,000
Withdrawal 5,000 2,000 10,000 5% of AI** 20,000
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Net income (loss) (25,000) ? ? 40,000 20% of BC***

Ending capital ? 135,000 ? 300,000 150,000
*decrease in capital during the period amounts to P 15,000.
**Additional investment
***Beginning capital

Problem 4:
Case 1: Case 2: Case 3: Case 4: Case 5:
Asset 500,000 ? 600,000 ? 700,000
Liabilities ? 400,000 ? 500,000 ?
Beginning capital 100,000 200,000 ? 400,000 ?
Revenues 600,000 500,000 400,000 ? ?
Expenses 700,000 ? ? 600,000 500,000
Net income (loss) ? 100,000 300,000 (100,000) (80,000)
Additional investment ? 50,000 100,000 80,000 -
Withdrawal 100,000 200,000 50,000 200,000 100,000
Ending capital 350,000 ? 500,000 ? 400,000

Problem 5: The liabilities of a company amounted to P 200,000 and its assets is equal to 150% of
Owner’s equity.
1. How much is the assets of the company?
2. How much is the owner’s equity?

Problem 6: A company’s owner’s equity amounted to P 140,500 and its liabilities is equal to 33 1/3% of
its assets

3. How much is the company’s liabilities?

4. How much is the company’s assets?

Problem 7: The business is a servicing business. For the period, it collected P 75,000 cash and still has
receivables amounting to P 35,000 for the total services rendered.

5. How much is the business revenue for the period?

Problem 8: The owner of the business reported the following expenses for the period:
Salaries of business employees P 30,000
Salaries of househelp in the owner’s residence 2,500
Cleaning supplies consumed in the conduct of business 2,500
Cleaning supplies used in the owner’s family car 1,000

6. How much is the total expenses deductible from business income to determine the
business profit or loss?
7. Using the information in problem 7 & 8, how much is the net income or loss of the
business?

Problem 9: Tom Jones is the owner and operator of Jones Enterprise, a motivational consulting
business. At the end of its accounting period, December 31, 2015, Jones Enterprise has assets of P
760,000 and liabilities of P 240,000. Use the accounting equation to calculate the answers in each of the
following:

8. Tom Jones, capital, as of December 31, 2015.

9. Tom Jones, capital, as of December 31, 2016, assuming that assets increased by P
120,000 and liabilities increased by P 72,000 during 2010.
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10. Tom Jones, capital, as of December 31, 2016, assuming that assets decreased by P
60,000 and liabilities increased by P 21,600 during 2010.
11. Tom Jones, capital, as of December 31, 2016, assuming that assets increased by P
100,000 and liabilities decreased by P 38,400 during 2010.
12. Net income (loss) during 2016, assuming that as of December 31, 2016, assets were
P 960,000, liabilities were P 156,000, and there were no additional investments or
withdrawals.
13. Net income (loss) during 2016, assuming that as of December 31, 2016, assets were
P 1,040,000, liabilities were P 456,000, Additional investments and withdrawals
during the period amounted to P 150,000 and P 60,000, respectively.
14. Additional investments during 2016, assuming that as of December 31, 2016, assets
were P 1,200,000, liabilities were P 390,000, Net income (loss) during 2016 amounts
to P 112,000 and withdrawals of P 90,000.
15. Withdrawals during 2016, assuming that as of December 31, 2016, assets were P
1,000,000, liabilities were P 457,000, Net loss during 2016 amounts to P 264,000 and
additional investments of P 320,000.

Problem 10: The business was put up from a cash of P 100,000, the initial capital of the owner. Then, P
20,000 of the cash was used to purchase an equipment to be used in business. The purchase of
equipment resulted in a liability of P 10,000.

16. How much are the total assets of the business?

Problem 11: The owner started the business with a P 150,000 capital. At the end of the year, the total
value of claims of the creditors is P 80,000 and the equity of the owner is P 120,000 of the total assets.

17. How much is the total assets at the end of the year?

Problem 12: At the start of the year, the total assets of the business were P 150,000 and its liabilities
were P 50,000. At the end of the year, the total asset were valued at P 220,000, and the residual claim of
the owner is P 150,000.

18. How much is the increase or (decrease) in owner’s equity during the year?
19. How much is the increase or (decrease) in liabilities during the year?

Problem 13: The assets of the business comprise of P 100,000 cash and P 900,000 land and building.
The land and building have unpaid mortgage, the only liability of the business. The owner’s equity is P
650,000.

20. How much is the unpaid mortgage on the land and building?

Problem 14: The initial investment of the owner in his business is P 75,000. At the end of the year,
the total assets of the business amounted to P 100,000 which consists of P 50,000 cash and P 50,000
equipment. The equipment has an unpaid balance of P 20,000, the only liability of the business.

21. How much is the owner’s equity at the end of the year?

Problem 15: The owner started the business with a cash investment of P 150,000 as a starting capital.
At the end of the year, the total value of claims of the creditors is 30% of the business’ assets and the
owner’s equity increased by 40%.

22. How much is the increase or (decrease) in the assets of the business during the year?
23. How much is the claims of the creditors at the end of the year?
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Problem 16: The following information was available:

 Assets, 1/1 P 203,000
 Accounts Receivable, 1/1 50,000
 Expenses incurred during the year 350,000
 Decrease in liabilities during the year 38,000
 Owner’s Equity, 12/31 60% of Assets, 12/31
 Accounts Receivable, 12/31 75,000
 Collections on accounts receivable 225,000
 Liabilities, 1/1 45% of Owner’s Equity, 1/1
 Rendered services for cash 70,000
 Owner’s cash withdrawal 120% of Additional investments during the year

Use the accounting equation to answer the following:

24. Net income (loss) for the year.
25. Owner’s equity, 12/31.
26. Owner’s additional investments.
27. Owner’s cash withdrawal.
28. Liabilities, 1/1.
29. Increase or (decrease) in assets.
30. Owner’s equity, 1/1.

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is
great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't
settle. As with all matters of the heart, you'll know when you find it.”
~Steve Jobs

Suggested Key
I. CONCEPTUAL SKILLS
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A. Morse Type B. Multiple Choice

1. A 1. B
2. B 2. A
3. A 3. D
4. B 4. B
5. C 5. E
6. C 6. C
7. D 7. D
8. D 8. A
9. B 9. A
10. C 10. E

C. Identification of the effects on the accounting equation

11. The owner withdraws cash from the business for personal use.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

12. The company repays the bank that had lent money to the company.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

13. The company purchases a significant amount of supplies on credit.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

14. The company purchases land by paying half in cash and signing a note payable for the other
half.
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

15. The owner contributes his/her personal truck to the business.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

16. The company receives cash from a bank loan.

Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

Use the following information for items 7 – 10:

Company XYZ provides consulting services to Client QOP in May. Company XYZ bills Client QOP in May
for the agreed upon amount of P 5,000. The sales invoice shows that the amount will be due in June.

17. In May, Company XYZ records the transaction by a debit to Accounts Receivable for P 5,000
and a credit to Service Revenues for P 5,000. What is the effect of this entry upon the
accounting equation for Company XYZ?
Assets Increase Decrease No effect
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Liabilities Increase Decrease No effect

Owner’s Equity Increase Decrease No effect

18. In June, Company XYZ receives the P 5,000. What is the effect on the accounting
equation and which accounts are affected at Company XYZ?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

19. What is the effect on Client QOP's accounting equation in May when Client QOP records the
transaction as a debit to Consultant Expense for P5,000 and a credit to Accounts Payable for
P5,000?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

20. What is the effect on Client QOP's accounting equation in June when Client QOP remits the
P5,000? Also, which accounts will be involved?
Assets Increase Decrease No effect
Liabilities Increase Decrease No effect
Owner’s Equity Increase Decrease No effect

II. Computational and Analytical skills

Problem 1:
Case 1: Case 2: Case 3: Case 4: Case 5:
Assets 125,000 120,000 250,000 100% 300,000
Liabilities 50,000 40,000 110,000 40% 35%
Owner’s equity 75,000 80,000 140,000 60% 195,000

Problem 2:
Case 1: Case 2: Case 3: Case 4: Case 5:
Revenues 150,000 175,000 90,000 190,000 400,000
Expenses 80,000 125,000 130,000 215,000 150,000
Profit/Loss 70,000 50,000 (40,000) (25,000) 62.5%

Problem 3:
Case 1: Case 2: Case 3:* Case 4: Case 5:
Beginning capital 100,000 90,000 120,000 146,000 100,000
Additional investment 20,000 10,000 30,000 120,000 50,000
Withdrawal 5,000 2,000 10,000 5% of AI** 20,000
Net income (loss) (25,000) 37,000 (35,000) 40,000 20% of BC***
Ending capital 90,000 135,000 105,000 300,000 150,000
*decrease in capital during the period amounts to P 15,000.
**Additional investment
***Beginning capital

Problem 4:
Case 1: Case 2: Case 3: Case 4: Case 5:
Asset 500,000 550,000 600,000 680,000 700,000
Liabilities 150,000 400,000 100,000 500,000 300,000
Beginning capital 100,000 200,000 150,000 400,000 580,000
Revenues 600,000 500,000 400,000 500,000 420,000
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Expenses 700,000 400,000 100,000 600,000 500,000

Net income (loss) (100,000) 100,000 300,000 (100,000) (80,000)
Additional investment 450,000 50,000 100,000 80,000 -
Withdrawal 100,000 200,000 50,000 200,000 100,000
Ending capital 350,000 150,000 500,000 180,000 400,000

Computational and Analytical skills (continued)

1. P 600,000 16. P 110,000
2. P 400,000 17. P 200,000
3. P 70,250 18. P 50,000
4. P 210,750 19. P 20,000
5. P 110,000 20. P 350,000
6. P 32,500 21. P 80,000
7. P 77,500 22. P 150,000
8. P 520,000 23. P 90,000
9. P 568,000 24. (P 30,000)
10. P 438,400 25. P 37,500
11. P 658,400 26. P 362,500
12. P 284,000 27. P 435,000
13. (P 26,000) 28. P 63,000
14. P 268,000 29. (P 140,500)
15. P 33,000 30. P 140,000

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