Basic Accounting(ACC 122) CHAPTER 3

Accounting equation

I. Review of Previous Chapters- Indicate your answer in the space provided before each number
that corresponds to the applicable accounting assumption/principle described below.

_____b__1. Requires that expenses incurred in producing revenues be matched with related
revenues during the accounting period.

_____e__2. Under this principle, regardless of cash flow, income is recognized as earned when
service has been rendered and expense is recognized as incurred when service has been received
or asset has been used up.

____a___3. Cash paid or its equivalents should be used to measure assets on the date that these
are acquired.

___d____4. Revenue should be recorded when there is an inflow of net assets from the sale of
goods or delivery of service.

___c____5. The life of the business is divided into uniform periods of time so that the accountant
may be able to prepare financial statements.

a. Cost b. Matching c. Accounting Period d. Revenue Recognition e. Accrual

II. Write the word TRUE if the statement is correct and the word FALSE if incorrect in the blank
space provided for in each statement below:

____t___1. An increase in an expense is recorded as a debit.

_____f__2. Accounts payable is an account which has a normal debit balance.

_____f__3. When a company hires an employee, is a recordable event.

____f___4. Another word for expense is debt.

___f____5. Unused office supplies are an expense.

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_____f__6. Liabilities are established by debiting and decreased by crediting

__f_____7. Debit means increase and credit means decrease.

____f___8. The normal balance of account is the side in which it decreases.

____f___9. The owner's capital in a sole proprietorship is called "partner's equity".

_____f__ 10. A debit entry always decreases the account balance.

___t____11. For every transaction there is at least one account affected.

____f___12. A cash acquisition of a Samsung computer for business use will cause a decrease in
the total assets of the company. (remain the same, exchange of assets)

___t____13. The basic summary device in accounting is the accounting equation.

____f___14. Assets minus capital equal expenses. (liability)

____f___15. Accounts receivable is considered an equity account. (asset)

____t___16. Paying salaries of employees is an increase in an expense account.

____t___17. Increases in asset accounts are recorded by debiting.

___f____18. Increase in asset account and decrease in equity account is a possible entry.

____f___19. Gains arise in the ordinary course of business, while revenue does not. (reverse)

___t____20. Cash is a current asset.

II. Multiple Choice (Theory) Indicate your answer by encircling the correct letter of your answer.
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1. A company received P 5,000 cash from customers to apply on account. The effect of the
transaction is (entry: debit CASH credit AR)

a. an increase in an asset account and an increase in revenue.

b. an increase in an asset and a decrease in capital

c. an increase in an asset and a decrease in another asset

d. none of the foregoing

2. Which of the following is not accountable?

a. Received and paid a phone bill b. bought supplies on account

c. Acquire equipment on account d. Signing of employee's contract

3. Which of the following is a form of revenue?

a. A check paying utilities (expense) b. A bank loan (liability)

c. A check paying debt to creditors’ (payment of liab) d. Sales from the business

4. Which of the following is a current asset?

a. Long term investment b. Property plant and equipment

c. intangible assets d. Accounts receivable

5. When the proprietor withdraws cash, the drawing account is

a. debited b. credited c. both A and B d. do nothing

6. A credit entry increases the balance of

a. capital b. assets c. drawings d. expenses

7. A credit entry decreases the balance of

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Accounting equation
a. assets b. capital c. revenue d. liabilities

8. Decrease in asset may result to

a. decrease another asset b. decrease liabilities

c. increase capital d. increase liabilities

9. Which of the following is an intangible asset?

a. copyright b. patent c. trademark d. all of the above

10. in recording transactions

a. the word "debit" means increase and the word “credit" means decrease

b. Assets, expenses and drawing accounts are debited for increases

c. Liabilities, revenue and drawing accounts are debited for increases.

d. Assets, expenses and capital accounts are debited for increases.

11. Which of the following will be increase by a debit?

a. Notes Payable b. Salaries expense c. Accounts Payable d. Owner's equity

12. A common business transaction that would not affect the amount of owner's equity is

a. signing a note payable to purchase equipment (this decreases both assets and liabilities, so
no effect on OE)

b. payment of property taxes (expense)

c. billing of customers for services rendered (revenue)

d. payment of utilities expense (expense)

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Accounting equation
13. Which of the following is a liability of the firm?

a. A building owned by the firm b. Cash in the firm's bank account

c. Money in which the firm has borrowed but not yet paid d. Money set aside for current
purposes.

14. Which of the following is correct?

Assets Liabilities Owner's equity

a. 4 2 2

b. 2 4 2

c. 1 2 1

d. 4 4 0

15. The first name of your professor in accounting is ______ Marmolejo (HAHA)

a. Conrado b. Vitalie c. Nomer d. Dolphy

III. Identify each of the following according to its classification. Answers may be: Capital, Income,
Liability, Asset and Expense (e.g.: Cash - asset)

1. Vidal, capital C

2. Inventory A

3. Sales I

4. Accounts payable L

5. Accounts receivable A

6. Intangible assets A
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7. Rafa, drawings C

8. Notes payable L

9. Interest income I

10. Interest expense E

11. Cash equivalents A

12. Bonds payable L

13. Equipment A

14. Prepaid expenses A

15. Notes receivable A

IV. Comprehensive Problem (Financial Transaction Worksheet)

The accounts and transactions of Mr. Benj Seeyah, Service Consultant, are shown below:

a. Invested P 50,000 cash to start the business

b. Paid P3, 500 for one month's rent of the business.

c. Bought office furniture for cash P 6,000

d. Performed services for P10, 000 in cash

e. Performed services for P 12,000 on credit

f. Bought a desktop computer for business use; paid 50% down balance in 30 days for P 15,000

g. Acquired a Xerox machine for 20,000 on credit: paid P 5,000 balance due in 30 days.

h. Issued a check amounting to P 15,000 for salaries of employees.

i. Bought additional office chairs for P8, 000 on credit

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j. Collected P 6,000 on accounts receivable

k. Performed services P 12,500 for cash

l. Paid P 2,250 for the monthly telephone bill

m. Seeyah withdraws P5, 000 cash for personal expenses.

*Required: Record the transactions for the month using a financial transaction worksheet. Use the
following accounts: Cash; Accounts receivable; Office furniture; Office equipment; Accounts
payable; Seeyah, Capital. If the owner's equity account is affected by a transaction, identify it as a
revenue, expense, investment or withdrawal.

V. Knowledge on the T- account

Dr. Afazer C. Talinga, a CPA and a taxation expert in the Philippines opened a taxation firm
named "Bluekeepers" on April 1 by leasing an office space. He invested cash of P 500,000 and
furniture and fixtures of P 100,000. Additional transactions are as follows:

April 3 Purchase a computer costing P 80,000. Paid 50% and promised to pay the
balance after 30 days

5 Paid for the publication in a newspaper of the opening of the taxation firm,
P15, 000

8 Purchased office supplies and paid P 15,000

9 Installed a set of accounting software for P 350,000 and issued a promissory note

10 Rendered tax services to clients who paid cash P 50,000

11 Paid the balance owed for the computer purchased on April 3

13 Billed Joey Aquino P 15,000 for rendering on him tax services

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14 Banco de Oro grants a loan to Talinga amounting to P 500,000 for a purchase of
condominium for residential purpose.

15 Paid salaries of staff amounting to P 25,000

18 Talinga withdraw P 10,000 cash

20 Hire an independent tax expert as a consultant on the firm.

25 Paid for the amount owed on the accounting software

27 Joey Aquino settles his account.

28 Paid expenses composed of:

Rent- P 50,000, Utilities- P 10,000

30 Supplies used amounted to P 5,000

31 Returned some pieces of defective furniture and fixtures to Manalo Furnishings

which was refunded in cash P 2,000.

* Required

1. With the aid of the T accounts, record the transactions listed above. Use the following
accounts: Cash; Accounts receivable: Office Supplies: Furniture and Fixtures; Office equipment:
Accounting Software: Accounts Payable: Notes Payable: Talinga, Capital; Talinga, Withdrawals;
Accounting Fees Revenues; Advertising expense; Salaries expense; Rent expense; Utilities
expense; office supplies expense.

2. Determine the ending balances of the T-accounts.

End of the Line!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

“Dreams get you started, but discipline keeps you going”