ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM

Matching

For the items listed below, fill in the appropriate code letter to indicate whether the item is an
asset, liability, or owner's equity item.

Code
Asset A
Liability L
Owner's Equity OE

_______ 1. Rent Expense _______ 6. Cash

_______ 2. Office Equipment _______ 7. Accounts Receivable

_______ 3. Accounts Payable _______ 8. Don Pine, Drawing

_______ 4. Don Pine, Capital _______ 9. Service Revenue

_____ 5. Insurance Expense _____ 10. Notes Payable

True or False

1. A debit to an account indicates an increase in that account.

2. The normal balance of all accounts is a debit.

3. A credit balance in a liability account indicates that an error in recording has

occurred.

4. The double-entry system is a logical method for recording transactions and results in
equal debits and credits for each transaction.

5. The drawing account is a subdivision of the owner's capital account and appears as an
expense on the income statement.

6. Under the double-entry system, revenues must always equal expenses.

7. The basic accounting equation is in balance when the creditor and ownership claims
against the business equal the assets.

8. The purchase of store equipment for cash reduces the owner's equity by an equal
amount.

9. The basic accounting equation states that Assets = Liabilities.

10. Debit and credit can be interpreted to mean increase and decrease, respectively.
Multiple Choice Questions

1. Owner's equity is best depicted by the following:

A. Assets = Liabilities.
B. Liabilities + Assets.
C. Residual equity + Assets.
D. Assets – Liabilities.

2. The basic accounting equation may be expressed as

A. Assets = Equities.
B. Assets – Liabilities = Owner's Equity.
C. Assets = Liabilities + Owner's Equity.
D. all of these.

3. If total liabilities increased by RM4,000, then

A. assets must have decreased by RM4,000.

B. owner's equity must have increased by RM4,000.
C. assets must have increased by RM4,000, or owner's equity must have decreased
by RM4,000.
D. assets and owner's equity each increased by RM2,000.

4. For the basic accounting equation to stay in balance, each transaction recorded must

A. affect two or less accounts.

B. affect two or more accounts.
C. always affect exactly two accounts.
D. affect the same number of asset and liability accounts.

5. If an individual asset is increased, then

A. there must be an equal decrease in a specific liability.

B. there must be an equal decrease in owner's equity.
C. there must be an equal decrease in another asset.
D. none of these is possible.

6. The left side of an account is

A. blank.
B. a description of the account.
C. the debit side.
D. the balance of the account.
 7. The right side of an account

A. is the correct side.

B. reflects all transactions for the accounting period.
C. shows all the balances of the accounts in the system.
D. is the credit side.

8. A debit to an asset account indicates

A. an error.
B. a credit was made to a liability account.
C. a decrease in the asset.
D. an increase in the asset.

9. The normal balance of any account is the

A. left side.
B. right side.
C. side which increases that account.
D. side which decreases that account.

10. An accountant has debited an asset account for RM1,000 and credited a liability
account for RM500. What can be done to complete the recording of the transaction?

A. Nothing further must be done.

B. Debit an owner's equity account for RM500.
C. Debit another asset account for RM500.
D. Credit a different asset account for RM500.

Essay

1. What is the accounting equation? What does it mean?

Problems

Question 1
Analyze the transactions of a business organized as a proprietorship described below and
indicate their effect on the basic accounting equation.

a) Received cash RM 4,000 for services rendered.

b) Purchased office equipment on credit RM 50,000.

c) Paid employees’ salaries by cash RM 2,000.

d) Received cash from customer in payment on account RM 2,500.

e) Paid telephone bill for the month RM 200 by cheque.

Question 2
The following transactions represent part of the activities of Lyon Company for the first
month of its existence. Indicate the effect of each transaction upon the total assets of the
business by one of the following phrases: increased total assets, decreased total assets, or
no change in total assets.

a) The owner invested cash to start the business.

b) Purchased a computer for cash.

c) Purchased office equipment with money borrowed from the bank.

d) Paid the first month's utility bill.

e) Collected an accounts receivable.

f) Owner withdrew cash from the business.

Question 3
Analyze the transactions and indicate the account to be debited and the account to be
credited.

a) The owner, Borhan, invests RM 20,000 in cash in starting a real estate office operating as
a sole proprietorship.
b) Purchase RM 400 of supplies on credit.
c) Real estate commissions billed to clients amount to RM 5,000.
d) Borhan withdrew RM 1,200 from the business for living expenses.
e) Received cheque for RM 4,000 from a client in payment on account for commissions
billed previously.
Question 4
Indicate the account to be debited and credited for each of these transactions.

Debit Credit

a) Owner contributes cash to the business RM 20,000. ________ _______

b) Paid salaries to employees RM 2,000 by cheque. ________ _______

c) Purchase inventories on account from XYZ Ltd for

RM 5,000. ________ _______

d) Sold inventories for cash to customers RM 350. ________ _______

e) Received payment from customer for the services

rendered RM 500 in cash. ________ _______

Question 5
Indicate the increase or decrease by stating the accounts involved with (+) or (-).

Effects on:
Asset Liability Owner’s
Equity
a) Bought fixtures RM 2,000
paying by cheque.

b) Repaid by cash a loan owed to

Sarah RM 1,500.

c) The owner takes out RM 200

cash for his personal use.

d) The owner puts further RM6,000

cash into the business.

e) A debtor returns goods worth

RM200.
Question 6
Johari decides to open a cleaning and laundry service that will operate as a sole
proprietorship near the local college campus. Analyse the following transactions for the
month of June in terms of their effect on the basic accounting equation. Record each
transaction by increasing (+) or decreasing (–) the amount of each item affected.

a) Johari invests RM 20,000 in cash to start a cleaning and laundry business on June 1.
b) Purchased laundry equipment for RM 7,000 paying RM 4,000 in cash and the remainder
due in 30 days.
c) Purchased laundry supplies for RM 1,200 cash.
d) Received a bill from Campus News for RM 200 for advertising in the campus newspaper.
e) Cash receipts from customers for cleaning and laundry amounted to RM 1,500.
f) Paid salaries of RM 400 to student workers.
g) Billed the Tiger Football Team RM 100 for cleaning and laundry services.
h) Paid RM200 to Campus News for advertising that was previously billed in Transaction 4.
i) Johari withdrew RM 900 from the business for living expenses.
j) Incurred utility expenses for month on account, RM 400.