Grade 12

Chapter 2
Accounting Equation

Name: ………………………………………………………

A/L Year: ………………………………………………………

Contact details: 0778759158

Maryam Ali Mohamed (ACCA Lecturer @ PPIM)

 Chapter 2 – Accounting Equation
1. Which of the following pair of account type balances are closed and carried forward respectively at the
end of an accounting year?

Closed Carried forward

(1) Asset Expense
(2) Expense Asset
(3) Liability Income
(4) Income Expense
(5) Equity Expense (……)

 Use the following information to answer questions No. 2 and 3.

A company which commenced its business on 01.04.2009 with a stated capital of Rs. 75 million, has
given the following information for the years 2010/11 and 2009/10.

Description 2010/11 (Rs. million) 2009/10 (Rs. million)

Total income 150 100
Total expenses (excluding income tax) 90 120
Income tax 20 -
Dividends paid 10 -
Revaluation surplus as at 31st March 15 -
Total assets as at 31st March 150 80

2. What were the total liabilities as at 31.03.2010?

(1) Rs. 5 million
(2) Rs. 15 million
(3) Rs. 20 million
(4) Rs. 25 million
(5) Rs. 60 million (……)

3. What was the equity as at 31.03.2011?

(1) Rs. 85 million
(2) Rs. 95 million
(3) Rs. 100 million
(4) Rs. 115 million
(5) Rs. 120 million (……)

4. State a similarity and a difference between ‘Liabilities’ and ‘Equity’.

(a) Similarity: ……………………………………………………………………………………………………………………….
(b) Difference:………………………………………………………………………………………………………………………..

Page 1|8
5. An entity paid Rs. 8 000 for maintaining a machine. The effect of this transaction is shown in the
accounting equation as a
(1) Decrease in assets Rs. 8 000 and decrease in liabilities Rs. 8 000.
(2) Decrease in assets Rs. 8 000 and increase in liabilities Rs. 8 000.
(3) Decrease in assets Rs. 8 000 and decrease in equity Rs. 8 000.
(4) Decrease in assets Rs. 8 000 and increase in equity Rs. 8 000.
(5) Decrease in assets Rs. 8 000 and increase in assets Rs. 8 000. (……)

6. The balance of the capital account of a sole trader was increased by Rs. 500 000 during a year. Which
of the following transactions would not reflect this increase?
(1) The business earned a profit of Rs. 500 000.
(2) The owner introduced Rs. 500 000 as new capital
(3) The owner brought his motor vehicle worth of Rs. 500 000 for business use.
(4) The owner paid his private debt of Rs. 500 000 from the business bank account.
(5) Rs. 500 000 due to a supplier of the business was paid from owner’s private bank account. (……)

7. During the year the assets of a sole trader increased by Rs. 400 000 and the liabilities increased by Rs.
50 000. If the profit of this year was Rs. 250 000, how much additional capital was introduced by the
owner?
…………………………………………………………………………………………………………………………………………

8. A business entity purchased goods listed as Rs. 200 000 on credit basis subject to a 10% trade discount.
The effect of this transaction is shown in the accounting equation as:
Assets Liabilities Equity
(1) Increase Rs. 180 000 Increase Rs. 180 000 -
(2) Increase Rs. 200 000 Increase Rs. 200 000 -
(3) Increase Rs. 180 000 Increase Rs. 200 000 Decrease Rs. 20 000
(4) Increase Rs. 200 000 Increase Rs. 180 000 Increase Rs. 20 000
(5) Increase Rs. 200 000 Increase Rs. 220 000 Decrease Rs. 20 000 (……)

9. State whether the following transactions and events of a business would lead to an increase, decrease
or no change on the balances of assets, liabilities and equity at the end of the accounting year.
Transaction Assets Liabilities Equity
A- Raising of capital from owners …………………. …………………….. ………………….
B- Provision for doubtful debts ………………….. …………………….. …………………..
C- Payment of a loan instalment
including interest ………………….. …………………….. ………………….
D- Declaration of dividends for ordinary
shareholders at the end of the year ………………… ……………………… ………………….

Page 2|8
10. A balance of Rs. 100 000, payable to a creditor of a business was settled by its owner out of his
personal money. At the time of settlement, the creditor allowed a discount of Rs. 10 000. The effect of
this transaction on liabilities and equity is shown in the accounting equation as:
Liabilities Equity
(1) Decrease by Rs. 90 000 Decrease by Rs. 90 000
(2) Decrease by Rs. 90 000 Increase by Rs. 90 000
(3) Decrease by Rs. 100 000 Decrease by Rs. 100 000
(4) Decrease by Rs. 100 000 Increase by Rs. 100 000
(5) Decrease by Rs. 110 000 Increase by Rs. 110 000 (……)

11. Indicate whether the following statements related to a firm are true or false in the appropriate column
with a ‘’.
Statement True False
A- The equity increases due to receipt of cash from a debtor. ……… ………
B- The equity decreases due to payment of interest on a loan. ……… ………
C- The profit for the year decreases when a dividend is paid to ……… ………
ordinary shareholders.
D- The year-end cash balance always increases when a profit is
earned during a year. ……… …….

12. A firm has purchased goods with a list price of Rs. 600 000 on credit subject to a 5% trade discount and
thereafter, sold for Rs. 650 000 on cash. The amount due to creditors has not been settled. The net
effect of these transactions is shown in the accounting equation as:
Assets Liabilities Equity
(1) Increased by Rs. 50 000 - Increased by Rs. 50 000
(2) Increased by Rs. 80 000 - Increased by Rs. 80 000
(3) Increased by Rs. 80 000 Decreased by Rs. 570 000 Increased by Rs.650 000
(4) Increased by Rs.650 000 Increased by Rs. 570 000 Increased by Rs. 80 000
(5) Increased by Rs. 650 000 Increased by Rs.600 000 Increased by Rs. 50 000 (……)

13. Sumudu has commenced a business on 01.04.2014 investing Rs. 500 000 cash. During the year,
Sumudu provided a Rs. 200 000 worth photocopier for the business and withdrew Rs. 50 000 from the
business as drawings. The business earned a profit of Rs. 120 000 during the year ending 31.03.2015.
(a) State the two items (with values) that contribute to increase in equity of the business as at
31.03.2015:
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
(b) What is the net assets of the business as at 31.03.2015?
Rs. ……………………………………………………………………………………………………………….

Page 3|8
14. A net salary of Rs. 900 000 was paid by a firm for the month ending 31.03.2016. The contributions of
employees and employer for the employee provident fund (EPF) are 10% and 15% respectively, and
these have not yet been paid for March 2016. EPF contribution is the only deduction made from the
employees’ salary. The effect of these transactions is shown in the accounting equation as:
Assets Liabilities Equity
(1) Decrease Rs. 900 000 Increase Rs. 150 000 Decrease Rs. 1 050 000
(2) Decrease Rs. 900 000 Increase Rs. 100 000 Decrease Rs. 1 000 000
(3) Decrease Rs. 900 000 Increase Rs. 250 000 Decrease Rs. 1 150 000
(4) Decrease Rs. 1 000 000 Increase Rs. 150 000 Decrease Rs. 1 150 000
(5) Decrease Rs. 1 000 000 - Decrease Rs. 1 000 000 (……)

15. Saman purchased goods for Rs. 100 000 on credit on 01.04.2016. On the same day, these goods were
sold for Rs. 120 000 on cash incurring Rs. 5 000 as selling expenses.
Show the net effect of these transactions in the accounting equation using the following format.
Assets (Rs.) ……………………………. = Liabilities (Rs.) …………………… + Equity (Rs) .………………

16. Following information has been extracted from the payroll of Saman’s business for the month of March
2019. This business was commenced on 01.03.2019.
Description Rs.000
Gross salary 500
Less: Employee contribution to Employees Provident Fund (EPF) – 10% 50
Net salary 450
Employer contribution to EPF – 15% 75
Employer contribution to employee trust fund (ETF) – 3% 15

The EPF and ETF of a particular month are remitted on the 10th day of the following month and the net
salary is paid in the same month itself.

Which of the following accounting equations reflects the effect above transactions in Saman’s business
as at 31.03.2019?
Assets (Rs.000) = Liabilities (Rs.000) + Equity (Rs.000)
(1) -450 +50 -500
(2) -450 +140 -590
(3) -500 - -500
(4) -500 +90 -590
(5) -500 +140 -640 (……..)

Page 4|8
17. State whether the following transactions of a business lead to an increase in its equity.
(If increases indicate with a ‘’ and if does not increase indicate with a ‘×’)
Transactions Increase in Equity
A- Sold goods costing Rs. 50 000 for Rs. 80 000 on credit ………………………………….
B- Owner provided an equipment worth Rs. 200 000 to the business ………………………..
C- Owner paid a loan instalment of Rs. 30 000 of the business from
his personal money ………………………..
D- Received a cash discount of Rs. 5 000 when a creditor was settled ………………………..

18. The monthly instalment of Rs. 100 000 for the loan obtained by his business was paid by Nuwan from
his personal cash. The interest included in the instalment was Rs. 25 000. Which of the following
accounting equation shows the net impact of these transactions? (Assume that financial statements
are prepared monthly)
Assets (Rs.) = Liabilities (Rs.) + Equity (Rs.)
(1) 0 -75 000 + 75 000
(2) 0 -100 000 + 100 000
(3) + 75 000 0 + 75 000
(4) -100 000 -100 000 0
(5) -100 000 -75 000 -25 000 (…….)

19. State the appropriate classification for the following accounts maintained in the general ledger.
Account Classification
A- Depreciation ……………………………………………….
B- Revaluation reserve ……………………………………………….
C- Trade payables ……………………………………………….
D- Discount received ……………………………………………….

20. Indicate how the net impact (values with (+) or (-) signs) of the following transactions of a business is
represented in the accounting equation.
Transaction Assets (Rs.) = Liabilities (Rs.) + Equity (Rs.)
A- Purchase of inventory on credit for
Rs. 150 000 ………………………. ……………………… …………………
B- Sale of inventory costing Rs. 90 000
for Rs. 140 000 on cash ………………………. ……………………….. …………………

21. Sumudu commenced a retail business on 01.03.2017 investing Rs. 800 000 in cash. During the month
ending 31.03.2017, goods costing Rs. 350 000 were purchased on credit and were sold for Rs. 400 000
on cash. Further, the business incurred Rs. 60 000 as expenses for the month, of which Rs. 20 000 was
payable as at 31.03.2017. state the following as at 31.03.2017.
(a) Assets (Rs.) ………………………………………………………………
(b) Liabilities (Rs.) ……………………………………………………………..
(c) Equity (Rs.) ……………………………………………………………..

Page 5|8
 Use the following information to answer questions No. 22 and 23.
The following transactions took place in Gemunu PLC during the month of March 2018. The accounting
year of the company ends on 31st March.
(i) Received cash Rs.500 000 by issuing ordinary shares.
(ii) Purchased goods for Rs.1 000 000 on credit.
(iii) Revalued the land for the first time, which resulted in a deficit of Rs.300 000.
(iv) Incurred advertising expenses of Rs.60 000, and it Is payable in May 2018.

22. Which of the following statements indicate the impact of each of the above transactions?
Impact Transaction
(indicate the No.)
A- Decrease in assets and decrease in equity ……………………………………….
B- Increase in liabilities and decrease in equity ………………………………………..
C- Increase in assets and increase in equity …………………………………………
D- Increase in assets and increase in liabilities …………………………………………

23. Indicate with ‘’ the types of account under which each of the above transactions is recorded in the
general ledger.
Transaction Type of account
Asset Liability Equity Income Expenses
(i) ……………………. …………………………. …………………… …………….. ……………….
(ii) ……………………. …………………………. …………………… …………….. ……………….
(iii) ……………………. …………………………. …………………… …………….. ……………….
(iv) ……………………. …………………………. …………………… …………….. ……………….

24. Categorize the following accounts into assets, liabilities, income, expenses and equity.
Account Classification
A- Provision for doubtful debts …………………………………………………..
B- Rent income received in advance …………………………………………………..
C- Retained earnings …………………………………………………..
D- Bad debts …………………………………………………..

Page 6|8
25. The following transactions took place in Nihal’s business.
01.03.2018 – Purchase of goods costing Rs. 150 000 from Upasena on credit.
05.03.2018 – Return of goods costing Rs. 30 000 to Upasena.
20.03.2018 – Sale of gods costing Rs. 100 000 for Rs. 160 000 on credit.
20.03.2018 – Payment of sales commission of Rs. 10 000.
02.04.2018 – Settlement of the full amount due to Upasena.

The accounting equation which shows the net impact of the above transactions in Nihal’s business as
at 31.03.2018:
Assets (Rs.) = Liabilities (Rs.) + Equity (Rs.)
(1) +50 000 - +50 000
(2) +60 000 - +60 000
(3) +170 000 +120 000 +50 000
(4) +170 000 +150 000 +20 000
(5) +180 000 +120 000 +60 000 (…..)

26. The equation that represents the profit earned by a business during a financial year:
(1) Year-end equity + Drawings + New capital introduced - beginning of the year equity.
(2) Year-end equity + Drawings - New capital introduced - beginning of the year equity.
(3) Year-end equity - Drawings + New capital introduced - beginning of the year equity.
(4) Year-end equity - Drawings - New capital introduced - beginning of the year equity.
(5) Year-end equity + Drawings + New capital introduced + beginning of the year equity. (……)

27. Nuwan opened a stationery trading shop on 01.01.2020. His brother, Sujith is the sole employee of this
business.
The following transactions took place during the month of January 2020.
No. Transaction Amount (Rs.‘000)
1. Invested cash by Nuwan to commence the business 300
2. Purchased stationery on cash 200
3. Purchased stationery on credit 550
4. Returned a part of stationery purchased on credit due to defects 50
5. Sold stationery on credit - This includes Rs. 64 000 Value Added Tax (VAT) 864
6. Paid the salary to Sujith 40

The cost of stationery sold during the month was Rs. 500 000. The electricity charges
payable by the business as at 31.01.2020 was Rs.30 000. Assume that there is no VAT on
purchases and other expenses.

What is the accounting equation that reflects the net effect of transaction No. 1, 2, 3 and 4?
Assets (Rs. '000) = Liabilities (Rs. '000) + Equity (Rs. '000)
(1) + 800 + 550 + 250
(2) + 800 + 500 + 300
(3) + 850 + 550 + 300
(4) + 1 000 + 700 + 300
(5) + 1 000 + 750 + 250 (……)

Page 7|8
 28. The following information has been extracted from the accounting records of a business.
As at 31.03.2020 (Rs. 000) As at 31.03.2019 (Rs. 000)
Assets 1 700 1 200
Liabilities 900 700
During the year ending 31.03.2020, the owner paid a loan installment of the business amounting to Rs. 120
000 from his personal funds. The owner obtains Rs, 90 000 from the business every year to pay the school fees
of his children. He does not draw any other money from the business.

The following for year ending 31.03.2020:

(a) Profit Rs. ………………………………………..
(b) Retained Earnings Rs. ………………………………………..

29. State the appropriate classification for following accounts maintained by a business in the general
ledger.
Account Classification
A - Bad debts ………………………………………
B – Drawings ………………………………………
C - Provision for gratuity ………………………………………
D - Accumulated depreciation on office equipment ………………………………………

Page 8|8