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3rd Edition - Unit 02

Unit 2 covers the accounting equation, which states that assets equal liabilities plus capital, and explains the concepts of assets, liabilities, and capital. It provides examples of transactions affecting these elements and introduces the concepts of trade receivables and trade payables. The unit includes exercises to reinforce understanding of the accounting equation and its applications in bookkeeping.

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Oana Elena
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15 views

3rd Edition - Unit 02

Unit 2 covers the accounting equation, which states that assets equal liabilities plus capital, and explains the concepts of assets, liabilities, and capital. It provides examples of transactions affecting these elements and introduces the concepts of trade receivables and trade payables. The unit includes exercises to reinforce understanding of the accounting equation and its applications in bookkeeping.

Uploaded by

Oana Elena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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UNIT 2 – THE ACCOUNTING EQUATION

AND DOUBLE ENTRY BOOKKEEPING

An asset is what the business owns.


A liability is what the business owes.

Accounting Equation

Assets = Liabilities

Accounting Equation

Assets = Liabilities + Capital

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Unit 2 – The Accounting Equation and Double Entry Bookkeeping

Accounting Equation

Assets - Capital = Liabilities


Assets - Liabilities = Capital

Example 2/1

Joyce Borg, a businesswoman, invests €25,000 into her business and places
it in the bank account of the business. Here we have to identify the two items
that are being affected. In this case the money in the business bank account
and Joyce’s investment or capital.
Bank (asset) increased by €25,000
Capital (capital) increased by €25,000*
* The owner’s investment has increased by €25,000 - the business owes her
€25,000 more.

Example 2/2

The business bought a motor van for €10,000 and paid for it by cheque.

Here again, we have to identify the two items that are being affected. These
are motor van and bank (cheque). The business has less money in the
bank and an increased value for motor van. Therefore the effect on this
transaction can be seen as:
Motor Van (asset) increased by €10,000
Bank (asset) decreased by €10,000

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The Accounting Equation and Double Entry Bookkeeping – Unit 2

Trade Receivables (Debtors) are amounts due from persons or


firms who owe the business money for goods or services
previously supplied to them. They are assets.

Trade Payables (Creditors) are amounts owed to persons or


firms for goods or services previously supplied to the business.
They are liabilities.

Example 2/3

The business buys office equipment on credit from Office Supplies Ltd for
€670.
Office Equipment (asset) increased by €670
Office Supplies Ltd (liability) increased by €670*

* The business owes Office Supplies Ltd more - the liability has increased.
Office Supplies Ltd is a Trade Payable. The business owes the value of the
office equipment to the supplier.

3
Unit 2 – The Accounting Equation and Double Entry Bookkeeping

EXERCISES

Q. 2/1

Define (a) assets, (b) liabilities, (c) capital.

Q. 2/2

What is the accounting equation? What does it mean?

Q. 2/3

Categorise the following as assets or liabilities or capital.


a) Buildings b) Loan to the firm by the bank
c) Equipment d) Cash
e) Cash paid into the firm’s bank account by the proprietor.

Q. 2/4

Which of the following is not an asset?


a) Trade Receivable b) Motor Vehicle
c) Trade Payable d) Inventory

Q. 2/5

Which of the following is a liability?


a) Cash Balance
b) Loan from J. Naudi
c) Trade Receivable
d) Buildings

Q. 2/6

Classify the following items into liabilities and assets:


Owing to Bank Office Equipment
Loan from D. Pace Motor Vehicles
Trade Receivable Trade Payable
Inventory Cash in Hand
Fixtures

4
The Accounting Equation and Double Entry Bookkeeping – Unit 2

Q. 2/7

Which of the following are shown under the wrong headings:


Assets Liabilities
Machinery Loan from J. Grixti
Loan to L. Caruana Cash at Bank
Trade Payable Trade Receivable
Capital Inventory

Q. 2/8

You are to complete the gaps in the following table:


Assets Liabilities Capital
€ € €
a) 82,500 25,600 ?
b) 47,450 ? 12,500
c) ? 27,520 39,500
d) 96,000 19,300 ?
e) 64,000 ? 12,000
f) ? 58,230 10,630

Q. 2/9

Which of the following is incorrect?


Assets Liabilities Capital
€ € €
a) 9,460 2,680 6,780
b) 7,390 1,140 6,250
c) 6,120 2,490 4,630
d) 8,970 3,580 5,390

Q. 2/10

Therese Cutajar started a business on 1st July 2009. Before she actually
commenced trading, she bought Shop Furniture €4,000, Motor Vehicles
€10,000 and Inventory (goods for resale) €7,000. She paid the Shop
Furniture and Motor Vehicles in full, but she still owed €2,800 for some of the
goods. In addition J. Galea lent her €6,000. Cutajar discovered that she had
€5,600 in her business Bank Account and €200 as Cash in Hand after these
transactions.

You are required to calculate her Capital after the above transactions took
place.

5
Unit 2 – The Accounting Equation and Double Entry Bookkeeping

Q. 2/11

Which of the following statements is incorrect?


Effect upon
Assets Liabilities
a) Paid Trade Payable by cheque – Bank + Trade Payable
b) Bought goods on credit + Inventory + Trade Payable
c) Received Trade Receivable in + Cash
cash – Trade
Receivable
d) Sold goods for cash + Cash
– Inventory

Q. 2/12

Complete the columns to show the effects of the following transactions:


Effect upon
Assets Liabilities Capital
a) The owner invests €5,000 into the
business bank account.
b) Bought shop fittings €300 paying
for them by cheque.
c) Bought shop fittings €680 on credit
from Marketing Equipment Ltd.
d) Bought goods for resale by cheque
for €540.
e) Bought goods for resale on credit
€900 from H. Galea.
f) Sold goods for cash €500.
g) Returned some shop fittings €25 to
Marketing Equipment Ltd as they
were unsuitable for use.

6
The Accounting Equation and Double Entry Bookkeeping – Unit 2

Q. 2/13

Complete the columns to show the effects of the following transactions:

Effect upon
Assets Liabilities Capital
a) Bought fittings paying for them by
cheque €700.
b) A Trade Receivable, K. Licari, pays
us by cheque €56.
c) Paid Trade Payable in cash €65.
d) The owner pays a Trade Payable
from his personal money €420.
e) H. Falzon lends the business
€7,000 by cheque.
f) Owner takes €85 from the
business cash for his personal use.
g) Repaid H. Falzon part of his loan
by cheque €1,000.

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