CHAPTER 5

Accounting Equation
OBJECTIVES After studying this chapter, a student should be able to:

Identify Assets and Liabilities Give examples of Assets and Liabilities State the Accounting Equation Use the accounting equation to calculate assets, capital and liabilities

Identifying Assets and Liabilities Assets: The assets of a business are what the firm owns or what other person/businesses owes to the business. Examples of Assets: Motor Vehicles Furniture and Fittings Property Cash and cash equivalent cash Cash and cash equivalent - bank Trade receivables

Liabilities: Liabilities are what the business owes to other people or businesses. Examples of Liabilities: Trade Payables Bank Overdraft Loan from Bank Loan from a person

Accounting Equation The accounting equation is also known as the statement of financial position equation. Like any other equation, the two sides of the equation must always be equal. The accounting equation is: Assets = Capital + Liabilities Example 1: Ben is a sole trader. He has the following assets and liabilities at 31st May 2011. $ Cash and cash equivalent cash Cash and cash equivalent bank Motor Vehicle Furniture Trade payables Trade Receivables Loan from bank Property Inventory Required: Prepare a statement to calculate the amount of capital. Assets Cash and cash equivalent cash Cash and cash equivalent - bank Motor Vehicle Furniture Trade Receivables Property Inventory $ $ 2 245 1 455 2 400 4 800 7 000 25 000 1 205 44 105 Less Liabilities Trade Payables Loan from bank 5 000 1 200 (6 200) Capital 37 905 2 245 1 455 2 400 4 800 5 000 7 000 1 200 25 000 1 205

Example 2: Calculate the amount of capital using the information given below: $ Bank overdraft Fixtures and fittings Motor Van Property Trade Payables Trade Receivables Inventory Cash and cash equivalent cash 10 000 2 000 7 000 25 000 8 000 9 000 2 800 2 600

Assets Fixtures and Fittings Motor Van Property Trade Receivables Inventory Cash and cash equivalent - cash

$ 2 000 7 000 25 000 9 000 2 800 2 600 48 400

Less Liabilities Bank overdraft Trade Payables 10 000 8 000 (18 000) Capital 30 400

Example 3: Complete the table given below: Assets (a) (b) (c) (d) (e) $ 300 000 ? $ 450 000 ? $ 700 000 Liabilities $ 200 000 $ 400 000 ? $ 280 000 $ 500 000 Capital ? $ 120 000 $ 600 000 $ 400 000 ?

Applying the accounting equation, Assets = Capital + Liabilities Assets (a) $300 000 Liabilities $200 000 Capital = $300 000 - $200 000 = $100 000 (b) = $400 000 + $120 000 = $520 000 (c) $450 000 = $600 000 - $450 000 = $150 000 (d) = $400 000 + $280 000 = $680 000 (e) $700 000 $500 000 = $700 000 - $500 000 = $200 000 $280 000 $400 000 $600 000 $400 000 $120 000

Multiple Choice Questions 1. Which of the following is the accounting equation? A. B. C. D. Assets = Capital + Liabilities Capital = Assets + Liabilities Liabilities = Capital + Assets Capital = Assets + Liabilities

2.

Which of the following is an asset? A. B. C. D. Cash and cash equivalent cash Capital Ordinary goods purchased Rent

3.

Which of the following is a liability? A. B. C. D. Cash and cash equivalent cash Trade receivables Trade payables Revenue

4.

Plant and Machinery, Motor Van, Computer and so on are examples of A. B. C. D. Assets Liabilities Capital Operating expenses

5.

Using the information given below, what is the amount of capital? Plant and Machinery Cash and cash equivalent - cash Bank overdraft Trade receivables Trade payables Bank loan A. B. C. D. $ 50 000 $ 40 500 $ 70 000 $ 45 000 30 000 15 000 5 000 12 000 8 500 3 000

6.

The following information is available: Plant and Machinery Cash and cash equivalent - cash Inventory Trade receivables Trade payables Capital 25 000 ? 15 000 12 000 9 500 65 000

What is the amount of cash and cash equivalent cash? A. B. C. D. $ 22 500 $ 23 000 $ 24 500 Nil

7.

A business has assets of $300 000 and liabilities of $120 000. Which of the following statement is correct? A. B. C. D. Capital of the business is $ 180 000 Capital of the business is $ 420 000 Capital of the business is zero None of the above

8.

The following information is available: Office equipement Motor Van Inventory Trade receivables Trade payables Capital Bank loan What is the amount of trade payables? A. B. C. D. $10 000 $19 500 $9 500 $40 000 25 000 18 000 9 000 7 500 ? 40 000 10 000

9.

Which of the following equations is incorrect? A. B. C. D. Assets Liabilities = Capital Capital + Liabilites = Assets Assets Capital = Liabilities

Assets + Liabilities = Capital

10.

Which of the following is correct? Assets A. B. C. D. $30 000 $50 000 $45 000 $80 000 Liabilities $10 000 $20 000 $30 000 $30 000 Capital $20 000 $70 000 $45 000 $110 000

11.

Example of an asset is A. B. C. D. Machinery Trade payables Bank overdraft Capital

12.

Liability can be identified as: A. B. C. D. Cash and cash equivalent cash Bank overdraft Office equipment All of the above

13.

Kathy has Property $50 000, cash and cash equivalent $12 000, inventory $7 000, trade payables $4 000 and bank loan of $3 000. What is the amount of capital? A. B. C. D. $60 000 $61 000 $62 000 $63 000

14.

Which one of the following is not an asset? A. B. C. D. Office equipment Cash and cash equivalent cash Bank overdraft Inventory

15.

Which of the following can be classified as a liability? A. B. C. D. Trade payables Bank overdraft Bank loan All of the above Structured Questions

1. (a) Define the following: (i) (ii) (iii) Assets Liabilities Capital

(b) Give three examples of assets and liabilities (c) State the accounting equation. Akash operates a retail shop which has the following assets and liabilities on 31st December 1991. $ Furniture Equipment Inventory Property Cash and cash equivalent cash Bank overdraft Trade payables Bank Loan Trade receivables Prepare a statement to calculate the capital of Akash. 35 000 25 000 7 500 40 000 2 300 3 500 6 800 15 000 13 000

2.

3.

Complete the following table Assets (a) (b) (c) (d) (e) $25 000 $35 000 ? $100 000 ? Liabilities $12 000 ? $40 000 ? $60 000 Capital ? $10 000 $20 000 $40 000 $15 000

4.

Complete the following table Assets (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 25 000 ? 100 000 150 000 ? 20 000 75 000 27 000 12 000 4 000 Liabilities 3 000 25 000 70 000 ? 80 000 0 50 000 3 000 ? ? Capital ? 18 000 ? 80 000 15 000 ? ? ? 4 000 500

5.

Prepare a statement using the information given below to calculate capital. $ Office equipment Computers Furniture and fittings Inventory Trade payables Trade receivables Cash and cash equivalent cash Bank overdraft Loan 7 500 3 800 5 000 1 700 900 1 200 1 000 2 300 2 000