FINANCIAL ACCOUNTING

ASSETS, LIABILITIES & ACCOUNTING EQUATION

1) _________________________is the excess of income over expenditure. When
expenditure exceeds income, the business is running at a ________________________.
2) A business must always be treated as a _________________________ from its owners
when preparing accounts.
3) The accounting equation is that the assets and liabilities of a business must always be
_________________________.
– Assets = (Capital introduced + retained profits – drawings) + liabilities.
4) Double entry bookkeeping reflects the fact that for every debit, there is an equal
_________________________. Therefore the total value of debit entries will always be
equal to the total value of credit entries.
5) At any point in time a business will have assets, liabilities and capital.
– _________________________are for use within a business.
– _________________________ are used to generate cash.
–_________________________are payables of the business.
6) A business is a _________________________entity, distinct from its
________________________. This applies to _________________________ businesses.
However, the law only recognises a _________________________ as a legal entity
separate from its _________________________. The liability of shareholders to the
company is _________________________to the amount the company asks them to pay
for their shares.
7) X starts a business with $50,000 cash, buying inventory $10,000 from cash and paying
business expenses of $1,000. Inventory is purchased on credit for $5,000. Following
these transactions, what is the capital of X's business?
A) $39,000
B) $49,000
C) $50,000
D) $54,000
8) A business receives an accountant's bill for $500. Which of the following statements
correctly shows the effect upon the accounting equation of the business, assuming the
bill is unpaid?
A) Assets decrease, liabilities increase
B) Capital decreases, liabilities increase
C) Capital increases, liabilities decrease
D) Assets decrease, capital decreases
9) Which of the following statements concerning a debit entry is correct?
A) It records a decrease in assets
B) It records a business expense

From the desk of SMA Page 1

FINANCIAL ACCOUNTING
C) It records a sale
D) It records an increase in the liabilities of a business (2 marks)
10) Which of the following statements concerning credit entries is correct?
A) Credit entries record decreases in capital or liabilities
B) Credit entries record increases in assets
C) Credit entries record increases in profits
D) Credit entries record increases in expenses
11) Which of the following correctly records the repayment of a loan of $10,000 plus
outstanding interest $500?
A) Assets – $10,500, capital – $10,500
B) Assets + $10,500, Liabilities + $10,500
C) Assets – $10,500, Liabilities – $10,000, Expenses + $500
D) Assets – $10,500, Liabilities – $10,500
12) A trade receivable is?
A) A person owing money to the business in return for goods supplied
B) A person to whom the business owes money in return for goods supplied
C) A person to whom the business owes money which was lent to finance the trading
operations of the business
D) A person who has purchased goods from the business
13) Which of the following is an example of an item of revenue expenditure?
A) Insurance of goods in transit to customers
B) Import duties charged on a new non-current asset for the business
C) Delivery and installation costs of a new non-current asset
D) A new delivery van
14) A business buys a machine for $500 (cash) and pays machinery insurance $50 (cash).
Which of the following shows the correct double entry for this transaction?
A) Debit machinery $550, credit cash $550
B) Debit cash $550, credit machinery $550
C) Debit machinery $500, credit cash $550, debit insurance $50
D) Debit cash $550, credit machinery $500, credit insurance $50
15) Which of the following statements is correct?
A) Sales invoices are recorded in the sales returns daybook and are summarised and
posted to the receivables ledger
B) Purchase invoices are recorded in the purchase daybook and are summarised and
posted to the payables ledger
C) Cash received is recorded in the cash book and posted to the journal
D) Adjustments to the financial statements are recorded in the cash book and
summarised and posted to the general ledger

From the desk of SMA Page 2

FINANCIAL ACCOUNTING
16) CASE I
Courtney Wilder uses some of the money invested to purchase a market stall from
George Sobers, who is retiring from his fruit and vegetables business. The cost of the
stall is $600. He also purchases some fruit and vegetables from a trader in the wholesale
market, at a cost of $340. This leaves $60 in cash, after paying for the stall and goods for
resale, out of the original $1,000. Courtney keeps $30 in the bank and draws out $30 in
small change. He is now ready for his first day of market trading on 3 September 20X8.
How does the accounting equation look now?

ASSETS CAPITAL

LIABILITIES

CASE II
On 3 September Courtney has a very successful day. He is able to sell all of his fruit and
vegetables, for $500 cash. Since Courtney has sold goods costing $340 to earn revenue
of $500, we can say that he has earned a profit of $(500 – 340) = $160 on the day's
trading. How do we reflect this in the accounting equation?
ASSETS CAPITAL

LIABILITIES

From the desk of SMA Page 3

FINANCIAL ACCOUNTING
CASE III
Since Courtney Wilder has made a profit of $160 from his first day's work, he might well
feel fully justified in drawing some of the profits out of the business. After all, business
owners, like everyone else, need income for living expenses. We will suppose that
Courtney decides to pay himself $100, in what he thinks of as 'wages', as a fair reward
for his day's work. How do we reflect this in the accounting equation?

ASSETS CAPITAL

LIABILITIES

CASE IV
The next market day is on 10 September, and Courtney gets ready by purchasing more
fruit and vegetables for cash, at a cost of $400. He had a family party to attend during
the day, however, and so he decided to accept the offer of help for the day from his
aunt, Sheila, whom he agrees to pay a wage of $50 at the end of the day. Trading on 10
September is again very brisk, and Courtney and Sheila sell all their goods for $760 cash.
Courtney pays Sheila her wage of $50 and draws out $150 for himself. How do these
transactions affect Courtney's capital?
ASSETS CAPITAL

LIABILITIES

From the desk of SMA Page 4

FINANCIAL ACCOUNTING
CASE V
On 10 September, in addition to all the other transactions, Courtney decides to hire a
van at a cost of $30 to transport the fruit and vegetables, paying for the hire out of cash
from his own pocket. How would this affect the accounting equation at the end of 10
September?

Net Profit Calculation

ASSETS CAPITAL

LIABILITIES

CASE VI
The example of Courtney Wilder's market stall will be continued further, by looking at
the consequences of the following transactions in the week to 17 September 20X8.
a) Courtney realises that he is going to need even more money in the business and so
he makes the following arrangements:
i. He invests immediately a further $200 of his own capital.
ii. He persuades his cousin Gary to lend him $400 immediately. Gary tells him that
he can repay the loan whenever he likes, but in the meantime he must pay him
interest of $3 per week each week at the end of the market day. They agree that
it will probably be quite a long time before the loan is eventually repaid.
b) Courtney is very pleased with the progress of his business, and decides that he can
afford to buy a second-hand van to pick up fruit and vegetables from his supplier
and bring them to his stall in the market. He finds a car dealer, Carrie Carver, who
agrees to sell him a van on credit for $550.Courtney agrees to pay for the van after
30 days' trial use.

From the desk of SMA Page 5

FINANCIAL ACCOUNTING
c) During the week before the next market day (which is on 17 September), Courtney's
Uncle Viv telephones him to ask whether he would be interested in selling him some
special West Indian spices and equipment for his kitchen. Courtney tells him that he
will look for a supplier. After some investigations, he buys what Uncle Viv has asked
for, paying $250 in cash to the supplier. Uncle Viv accepts delivery of the goods and
agrees to pay $320 at a later date.
d) The next market day approaches, and Courtney buys fruit and vegetables costing
$650. Of these purchases $550 are paid in cash, with the remaining $100 on 14 days'
credit. Courtney decides to use his aunt Sheila's services again as an assistant on
market day, at an agreed wage of $50.
e) For the third market day running, on 17 September, Courtney sells all his goods,
earning $1,050 (all in cash). He decides to take out drawings of $200 for his week's
work. He also pays Sheila $50 in cash. He decides to make the interest payment to
his cousin Gary the next time he sees him.
f) There were no van expenses.
I. State the accounting equations:
(a) After Courtney and cousin Gary have put more money into the business.
(b) After the purchase of the van.
(c) After the sale of goods to Uncle Viv.
(d) After the purchase of goods for the weekly market.
(e) At the end of the day's trading on 17 September, and after drawings have been
withdrawn from profit.
II. State the business equation showing profit earned during the week ended 17
September.

ASSETS CAPITAL

LIABILITIES

From the desk of SMA Page 6

FINANCIAL ACCOUNTING

ASSETS CAPITAL

LIABILITIES

ASSETS CAPITAL

LIABILITIES

ASSETS CAPITAL

LIABILITIES

From the desk of SMA Page 7

FINANCIAL ACCOUNTING

ASSETS CAPITAL

LIABILITIES

Business Equation

17) Consider each of the transactions below, and mark on the grid which area will be
increased and which decreased by the transaction. We have done the first one for you.
(a) The bank tells the business it no longer owes the bank $100 in bank charges.
(b) The business finds it has been overcharged $50 for some furniture it bought on
credit.
(c) A gas bill of $200 is received by the business.
(d) The owner withdraws $500 from the business.
(e) Cash is introduced into the business by its owner.
(f) A car is bought by the business, for payment in 1 month's time
Transaction = ASSETS = CAPITAL + LIABILITIES
(a)
(b)
(c)
(d)
(e)
(f)
18) Andy started a business and introduced capital of $10,000. He also obtained a loan of
$6,000 to purchase non-current assets. What is the value of Andy’s opening net assets?
A) $4,000
B) $6,000

From the desk of SMA Page 8

FINANCIAL ACCOUNTING
C) $10,000
D) $16,000
19) A trader's net profit for the year may be computed by using which of the following
formulae?
A) Opening capital + Drawings – Capital introduced – Closing capital
B) Closing capital + Drawings – Capital introduced – Opening capital
C) Opening capital – Drawings + Capital introduced – Closing capital
D) Closing capital – Drawings + Capital introduced – Opening capital
20) On 23 May 20X7, Julie used cash to pay the rent on her business premises for the three
months to 31 August 20X7 in advance. On 23 May, how is Julie's accounting equation
affected by this transaction?
Assets Liabilities Capital
A) Unchanged Unchanged Unchanged
B) Unchanged Reduced Reduced
C) Reduced Unchanged Unchanged
D) Reduced Unchanged Reduced
21) The profit made by a business in 20X7 was $35,400. The proprietor injected new capital
of $10,200 during the year and withdrew a monthly salary of $500. If net assets at the
end of 20X7 were $95,100, what was the proprietor's capital at the beginning of the
year?
A) $43,500
B) $55,500
C) $63,900
D) $126,300
22) A business had net assets at 1 January and 31 December 20X9 of $75,600 and $73,800
respectively. During the year, the proprietor introduced additional capital of $17,700
and withdrew cash and goods to the value of $16,300. What was the profit or loss made
by the business in 20X9?
A) $3,200 loss
B) $3,200 profit
C) $400 loss
D) $400 profit
23) Which of the following is a bank overdraft an example of?
A) Asset
B) Liability
C) Income
D) Expense
24) What is the main purpose of a statement of financial position?

From the desk of SMA Page 9

FINANCIAL ACCOUNTING
A) To report the current value of the business
B) To indicate if the business is trading profitably
C) To report the assets and liabilities of the business
D) To report the personal assets of the business owner
25) A business borrowed $1,700 from its bank, and used the cash to buy a new computer.
How was the accounting equation affected by these transactions?
Assets Liabilities
A) Unchanged Decreased
B) Unchanged Increased
C) Increased Increased
D) Increased Decreased
26) What is the main purpose of a statement of financial position?
A) To report the assets, liabilities and capital of the business at a particular date
B) To provide a valuation of the business at a particular date
C) To provide information about the activities of the business over a period of time
D) To report the growth in the value of capital since the business was established
27) Which of the following correctly calculates the difference between closing capital and
opening capital?
A) Profit – Capital introduced – Drawings
B) Profit + Capital introduced + Drawings
C) Profit – Capital introduced + Drawings
D) Profit + Capital introduced – Drawings
28) At the start of the year, the balance on David's capital account was $85,872. During the
year David made drawings of $19,500 and the net loss for the year was $1,700. He
introduced capital of $5,300. What is the closing balance on David's capital account at
the year end?
A) $73,372
B) $69,972
C) $98,372
D) $62,772
29) The net assets of Kate's business were $16,100 at 1 January 20X3 and $27,600 at 31
December 20X3. During the year Kate paid personal funds of $2,950 into the business
bank account and withdrew $1,450. What was the net profit for the year ended 31
December 20X3?
A) $11,950
B) $13,000
C) $7,100
D) $10,000

From the desk of SMA Page 10

FINANCIAL ACCOUNTING
30) The owner of a small business, which does not have an overdraft facility, draws out
some money for personal use. Which of the following correctly states the effect of the
drawings upon the accounting equation?
A) Assets increase, capital increases
B) Assets decrease, capital increases
C) Assets decrease, capital decreases
D) Assets decrease, liabilities decrease
31) A sole trader had opening capital of $10,000 and closing capital of $4,500. During the
period, the owner introduced capital of $4,000 and withdrew $8,000 for their own use.
Their profit or loss during the period was
A) $9,500 loss
B) $1,500 loss
C) $7,500 profit
D) $17,500 profit
32) The profit made by a sole trader in 20X7 was $35,400. The owner injected new capital of
$10,200 during the year and withdrew a monthly salary of $500. If net assets at the end
of 20X7 were $95,100, what was the capital at the beginning of the year?
A) $50,000
B) $55,500
C) $63,900
D) $134,700

From the desk of SMA Page 11