caf 1 – accounting equation accounting equation...

CAF 1 – Accounting Equation

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- Accounting Equation

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ACCOUNTING EQUATION

ACCOUNTING EQUATION – DUALITY CONCEPT

Usefulness

The accounting equation is a simplified way of showing a statement of financial position. It is also a useful introduction to the principles of double-entry book-keeping, and the duality concept that every transaction has two aspects that must be recorded.

Business entity concept

The use of the accounting equation is based on the business entity concept, that a business is a separate entity from the person or persons who own it. The owner puts capital into the business, and the business ‘owes’ this to the owner.

The equation Assets = Equity + Liabilities

or Equity (net assets) = Assets – Liabilities

EXTENDED ACCOUNTING EQUATION This is accounting equation where transactions are presented on cumulative basis and assets and liabilities are sub-classified according to their nature. One such format is given below: Sr. #

Assets = Equity + Liabilities

Cash Receivable Inventory Equipment Plant = Capital Payables Other liab.

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IMPACT OF TRANSACTIONS ON ELEMENTS OF ACCOUNTING EQUATION

Periodic inventory system Perpetual inventory system Drawings of goods

Equity (Drawings) Decreased Equity (Purchases) Increased

Equity (Drawings) Decreased Assets (Inventory) Decreased

Purchase of goods (on credit) Equity (Purchases) Decreased Liabilities (Payables) Increased

Assets (Inventory) Increased Liabilities (Payables) Increased

Sale of goods (on credit) Assets (Receivables) Increased Equity (Sales income) Increased

Assets (Receivables ) Increased Assets (Inventory at cost) Decreased

Equity (Profit) Increased


Latest update: April 2020

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BUSINESS EQUATION

LINK BETWEEN SCI AND SFP Statement of financial position (SFP)

A statement of financial position shows the financial position of a business at a given point in time and is a representation of the accounting equation.

Statement of comprehensive income (SCI)

A statement of comprehensive income shows the profit or loss for a period of time.

Impact of profit Profit in the statement of comprehensive income affects the statement of financial position, by adding to the owner’s capital.

Impact of drawings

Drawings out of profits also affect the statement of financial position, by reducing the owner’s capital.

Presentation of owners’ capital in SFP

Opening net assets (equity) ONA 1,000 Capital introduced + CI 500 Profit + P 200 Drawings – D (100) Closing net assets (equity) = CNA 1,600

.

The equation CNA = ONA + CI + P – D P = CNA – ONA – CI + D

SYLLABUS

Reference Content/Learning outcome A3 Accounting Equation

LO1.3.1 Understand and apply the accounting equation (Assets = Liabilities + Equity) Proficiency level: 2 & Testing level: 1

Past Paper Analysis A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20 08 08 - - 08 08 - 08 08 08 - 08


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PRACTICE Q&A

Sr.# Description Marks Reference PREPARING ACCOUNTING EQUATION 1C Bob – Accounting Equation and link with FS 12 QB 2C Paracha Enterprises – Accounting Equation with accruals 08 PE S18 3H Kamyaab Traders – Accounting Equation 10 PE S15 4C Arish Enterprises – Accounting Equation with Periodic

Inventory system 08 PE A16

5H Swat Enterprise 08 PE S19 NARRATION FROM ACCOUNTING EQUATION 6H Narration from Accounting Equation 08 PE A14 7C Ben Ten Traders – Narration from Accounting Equation 10 PE A18 8H Narration from Accounting Equation 08 PE S17

BUSINESS EQUATION 9C Use of business equation in finding missing figure I 03 CI

10C Use of business equation in finding missing figure II 03 CI



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QUESTION 01 Bob inherited Rs. 10,000,000 and decided to set himself up as a construction machinery distributor, starting to trade on 1 July. During July he entered into the following transactions:

(1) Paid the Rs. 10,000,000 into a business bank account (2) Bought Machine 1 for Rs. 1,000,000 cash (3) Bought Machine 2 for Rs. .2,500,000 cash (4) Sold Machine 1 for Rs. 1,500,000 cash (5) Paid rent for his premises of Rs. 300,000 cash. (6) Bought office equipment for Rs. 200,000 cash (7) Bought Machine 3 for Rs. 4,000,000 cash (8) Sold Machine 2 for Rs. 3,250,000 cash (9) Drew Rs. 400,000 in cash from the business

(Note: The word “cash” above is used to distinguish the transaction from credit transactions. All cash payments were made from the bank account.). Required: (a) Show the accounting equation which results from EACH of these transactions.

(Note: Each transaction follows on from the one before.) (04)

(b) The following transactions were entered into during August: (1) Bought Machine 4 for cash (Rs. 3,000,000) and Machine 5 (Rs. 2,500,000) (2) Sold Machine 4 for Rs. 4,500,000 cash (3) Received a telephone bill for Rs. 100,000 which he paid (4) Sold Machine 5 for Rs. 1,800,000 cash (5) Drew Rs. 600,000 in cash from the business (6) Bought an Machine 6 for Rs. 5,600,000 cash

Show the accounting equation at 31 August after ALL the above transactions. (04) (c) Prepare a statement of comprehensive income for the month ended 31 August and a

statement of financial position as at that date for Bob’s business. (04) QUESTION 02 Following information pertains to Paracha Enterprises, a sole proprietorship: (i) A machine costing Rs. 450,000 and having book value of Rs. 120,000 was sold for

Rs. 150,000. (ii) A purchase order for supply of goods amounting to Rs. 1,500,000 was issued to ABC

& Co. Payment would be made on delivery of the goods. ABC & Co. accepted the purchase order immediately.

(iii) Goods costing Rs. 200,000 were sold at 40% above cost. 20% of the sales amount had been received in advance and the remaining amount is to be received within 60 days.

(iv) Rent amounting to Rs. 600,000 was paid for offices premises. 40% of the rent paid had already been accrued in the books.

(v) A loan instalment of Rs. 545,000 including interest expense amounting to Rs. 45,000 was paid.

Required: Show the effects of the above information in the form of accounting equation. (08)


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QUESTION 03 Following transactions were recorded in the books of Kamyab Traders (KT) in the month of February 2015: (i) Stocks costing Rs. 80,000 were sold to customers at a margin of 20% on sales. 70%

of the sales were made to customers on one month’s credit and the balance on cash. (ii) Stocks worth Rs. 60,000 were purchased on two months credit. (iii) A bad debt of Rs. 10,000 was written off. No provision had been made prior to write

off. (iv) A new partner Mr. Sathi was admitted to KT’s business. Mr. Sathi brought Rs.

150,000 as his capital and Rs. 65,000 as his share of goodwill. (v) Stocks bought from a supplier amounting to Rs. 5,000 in January 2015 had been

posted to the credit of his account as Rs. 50,000. The difference in trial balance was entered in a suspense account. The error has now been rectified.

(vi) Borrowed Rs. 200,000 from bank at 12% mark-up.

Required: Show the effect of each of the above transactions in the form of an accounting equation.

(10)

QUESTION 04 Following information pertains to Arish Enterprises (AE) for the month of August 2016: (i) Goods purchased on credit for Rs. 842,000 were returned to the supplier. (ii) A customer bought goods amounting to Rs. 96,000. 40% payment was made in cash

and the balance amount was set off against amount payable by AE to the customer. (iii) An unidentified amount of Rs. 11,000 received in the bank account was credited to

the suspense account. At month end, it was found that the amount received represents a direct transfer into AE’s bank account by a foreign customer. The bank had credited AE’s account net of bank charges of Rs. 1,000.

(iv) A customer owes Rs. 348,000 to AE. It is expected that AE would be able to recover 60% and a provision for doubtful debts is to be made for the remaining amount.

(v) The owner withdrew cash of Rs. 35,000 and goods costing Rs. 65,000 for his own use.

Required: Show the effect of the above in the form of accounting equations. (08)

QUESTION 05 Following information pertains to Swat Enterprises (SE): (i) A machine was purchased for Rs. 3,500,000 against which 100% advance had

already been paid. SE also paid transportation and installation costs of Rs. 60,000 and Rs. 125,000 respectively on this machine.

(ii) Insurance premium amounting to Rs. 180,000 was paid which included an amount of Rs. 30,000 for the proprietor’s personal vehicle.

(iii) Office equipment having cost and carrying value of Rs. 265,000 and Rs. 89,000 respectively was sold for Rs. 95,000.

(iv) SE entered into rent agreement with the owner of a shop for annual rent of Rs. 300,000.

(v) Stock amounting to Rs. 75,000 was destroyed in fire in the warehouse. The stock was insured and insurance company agreed to pay Rs. 65,000.

(vi) SE incurred costs of Rs. 1,200,000 on extension of warehouse and Rs. 250,000 on miscellaneous repairs.

Required: Show the effects, if any, of each of the above information in the form of accounting equation. (08)



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QUESTION 06 The effect of certain transactions is summarised below in equation form:

All amount in Rupees

Description Assets = Liabilities + Owner’s equity

Cash Debtors Land Stocks Machine Creditors Capital Opening balance 118,600 177,800 500,000 206,800 164,200 191,500 975,900

(i) –14,600 - - - +14,600 - - (ii) +4,100 –4,100 – - - - - (iii) –16,000 - - - +61,600 +45,600 - (iv) – - - –66,100 – –66,100 - (v) +68,400 - - - - - +68,400 (vi) – - - - +9,600 +9,600 - (vii) –22,000 - - - - - –22,000 (viii) – –15,000 – - - –15,000

Closing balance 138,500 158,700 500,000 140,700 250,000 165,600 1,022,300

Required: Give brief narrative/description of each of the above transactions. (08) QUESTION 07 The following table depicts the effects of certain transactions of Ben Ten Trader in accounting equation form: Assets = Liabilities + Owner’s

equity Cash Debtors Inventory Equipment (i) +50,000 +50,000 -75,000 +25,000 (ii) +20,000 -50,000 -30,000 (iii) -23,000 -23,000 (iv) -15,000 +65,000 +50,000 (v) -15,000 -15,000 (vi) +60,000 -55,000 +5,000 (vii) -2,500 -17,500 -20,000 (viii) -17,000 +17,000 (ix) -35,000 +28,000 -7,000 (x) -39,200 -40,000 +800 Required: Give brief narrative/description of each of the above transactions. (10)


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QUESTION 08 The following table depicts the effects of certain transactions in accounting equation form: Transaction date 3-Jan 5-Jan 8-Jan 12-Jan 16-Jan 20-Jan 25-Jan 28-Jan ------------------------------ Rs. in million ---------------------------- ASSETS: Fixed assets - cost -5.00 Accumulated depreciation +2.40 Account RA – Gross -6.00 Provision for doubtful debts +1.20 Prepayments & other RA -4.80 Inventory +17.0 -20.00 -2.00 +8.00 -8.00 Cash & bank -4.25 +22.50 +3.00 -1.50 +3.00 -3.20 +9.50 -3.80 +12.75 +2.50 -1.80 -3.50 +0.40 - +1.50 -3.80 EQUITY: Capital -3.50 Profit & loss account +5.00 -1.80 +0.40 +1.50 -0.80 LIABILITIES: Long-term loans -3.00 Account payables +12.75 Accruals & other payables -2.50 +12.75 +2.50 -1.80 -3.50 +0.40 - +1.50 -3.80 Required: Give brief narration/description of each of the above transactions. (08) QUESTION 09 Sohaib operates a business as a sole trader. On 1 July 2013 the net assets of the business were Rs. 670,000. During the year to 30 June 2014, the business made a profit of Rs. 250,000 and Sohaib took out Rs. 220,000 in drawings. Due to a shortage of cash in the business, he paid in additional capital of Rs. 40,000 in early June 2014.

What are the net assets of business at 30 June 2014? (03) QUESTION 10 Nadia operates a business as a sole trader. On 31 March 2013 the net assets of the business were Rs. 950,000. During the year to 31 March 2013, the business made a loss of Rs. 20,000 and Nadia took out Rs. 150,000 in drawings during the year. She was also required to invest a further Rs. 290,000 during the year. What are the net assets of her business at 01 April 2012? (03)



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ANSWER 01 Part (a) Accounting equation – July (Rs. 000)

Transaction Assets Equity Bank Inventory Equip. Capital

(1) 10,000 10,000 (2) (1,000) 1,000

9,000 1,000 10,000 (3) (2,500) 2,500

6,500 3,500 10,000 (4) 1,500 (1,000) 500

8,000 2,500 10,500 (5) (300) (300)

7,700 2,500 10,200 (6) (200) 200

7,500 2,500 200 10,200 (7) (4,000) 4,000

3,500 6,500 200 10,200 (8) 3,250 (2,500) 750

6,750 4,000 200 10,950 (9) (400) (400)

6,350 4,000 200 10,550

Part (b) Accounting equation – August (Rs. 000)

Transaction Assets Equity Bank Inventory Equip. Capital

Balance 6,350 4,000 200 10,550 (1) (5,500) 5,500

850 9,500 200 10,550 (2) 4,500 (3,000) 1,500

5,350 6,500 200 12,050 (3) (100) (100)

5,250 6,500 200 11,950 (4) 1,800 (2,500) (700)

7,050 4,000 200 11,250 (5) (600) (600)

6,450 4,000 200 10,650 (6) (5,600) 5,600

850 9,600 200 10,650

Part (c) Bob – Statement of comprehensive income for the month ended 31 August 20XX Rs. 000 Rs. 000 Revenue[4,500 + 1,800] 6,300 Cost of goods sold Opening Stock 4,000 Purchases [5,500 + 5,600] 11,100 Less Closing Stock (9,600) (5,500) Gross profit 800 Less Expenses Telephone expense 100 (100) Net profit 700



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Bob – Statement of financial position as at 31 August 20XX Assets Rs. 000 Non-current assets Equipment 200 Current assets Inventory 9,600 Cash at bank 850 10,450 10,650 Owner’s equity Capital 10,550 Add Net profit 700 Less Drawings (600) 10,650 ANSWER 02 Paracha Enterprises S. # Head of account Assets = Equity + liabilities Rupees [Increase/(Decrease)] (i) Cash/Bank/Receivables 150,000 Fixed assets - cost (450,000) Accumulated depreciation 330,000 Fixed assets – net of Accumulated dep. (120,000) Gain on disposal 30,000 (ii) No business transaction takes place by issuing and accepting a purchase order.

Therefore, there is no effect on accounting equation. (iii) Stock in trade (200,000) Cost of sales (200,000) Sales (200,000×140÷100) 280,000 Profit on sales 80,000 Advance from customers (280,000×20%) (56,000) Account receivable (280,000×80%) 224,000 (iv) Cash/Bank (600,000) Accrued rent (600,000×40%) (240,000) Rent expense OR (360,000) Prepaid rent 360,000 (v) Cash/Bank (545,000) Loan (500,000) Interest expense (45,000)


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ANSWER 03

Items ----------------------Rupees---------------------- Assets = Equity + Liabilities (i) Cash + 30,000 Inventory - 80,000 Debtors + 70,000 Acc. Profit/Retained earnings + 20,000 (ii) Inventory + 60,000 Creditors + 60,000 (iii) Debtors - 10,000 Loss - 10,000 (iv) Cash + 215,000 Goodwill + 65,000 Capital + 150,000 (v) Creditors - 45,000 Suspense A/c - 45,000 (vi) Bank + 200,000 Loan payable + 200,000 ANSWER 04 Arish Enterprises S. # Head of account Assets = Equity + Liabilities

----------- Rupees [Increase/(Decrease)] ----------- (i) Account payable - - (842,000)

Purchase return - 842,000 - (ii) Sales - 96,000 -

Cash 38,400 - - Account payable - - (57,600)

(iii) Bank charges - (1,000) - Trade debtors (12,000) - - Suspense - - (11,000)

(iv) Bad debt expense - (139,200) - Provision for doubtful debts (139,200) - -

(v) Drawings - (100,000) - Purchases - 65,000 - Cash (35,000) - -

Note: This accounting equation question can be solved on the basis of periodic inventory system rather than more popular approach used in accounting equation of perpetual inventory system.



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ANSWER 05 Swat Enterprises S# Head of account Assets = Equity + Liabilities

Rupees [increase/(decrease)] (i) Machinery (3,500 + 60 +125) 3,685,000 Cash/Bank (185,000) Advance (3,500,000)

(ii) Cash/Bank (180,000) Drawings (30,000) Insurance expense (150,000)

(iii) Cash/Receivables 95,000 Office equipment – cost (265,000) Office equipment – accumulated dep. 176,000 Gain on disposal 6,000

(iv) No business transaction has taken place just by entering into rent agreement.

(v) Inventory (75,000) Insurance claim receivable 65,000 Loss (of inventory) (10,000)

(vi) Warehouse 1,200,000 Repairs and maintenance expense (250,000) Cash/Bank (1,450,000)

ANSWER 06 (i) Purchased machine for cash at a cost of Rs. 14,600. (ii) Received Rs. 4,100 cash from debtors. (iii) Purchased machine at a cost of Rs. 61,600; paid Rs. 16,000 cash and incurred a

liability for the remaining balance. (iv) Returned stock of Rs. 66,100 to supplier/creditor. (v) The owner invested Rs. 68,400 cash in business. (vi) Purchased machine on credit for Rs. 9,600. (vii) Amount of Rs. 22,000 drawn by the owner from business. (viii) Contra settlement of Rs. 15,000 between debit and credit balances of the same

party.


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ANSWER 07 (i) Goods costing Rs. 75,000 were sold for Rs. 100,000 and part payment of Rs. 50,000

received in cash. (ii) An amount of Rs. 20,000 was received from a debtor and remaining Rs. 30,000 were

written off. (iii) Goods purchased on credit for Rs. 23,000 were returned. (iv) Equipment was purchased for Rs. 65,000 against part payment of Rs. 15,000. (v) Inventory costing Rs. 15,000 was destroyed/lost/used in office/distributed as

sample/withdrawn by owner. (vi) Equipment having a net book value of Rs. 55,000 were sold for cash of Rs. 60,000. (vii) A liability of Rs. 20,000 was settled by adjusting receivable from same party of Rs.

17,500 and cash payment of Rs. 2,500. (viii) Owner paid to supplier Rs. 17,000 from personal cash. / A liability of Rs. 17,000 was

written back as it was no more payable. (ix) Goods costing Rs. 28,000 and sold on credit for Rs. 35,000 were returned by a

customer. (x) Payment of Rs. 39,200 was made to a supplier in settlement of Rs. 40,000.

ANSWER 08

Date Narration / Description of the transactions 3 Jan Goods costing Rs. 17 million purchased against 25% cash payment and

balance on credit.

5 Jan Goods costing Rs. 20 million sold for Rs. 25 million. 10% amount was received in advance and the balance has been collected on delivery.

8 Jan

Against the account receivable balance of Rs. 6 million, Rs. 3 million were recovered. Out of non-recoverable amount of Rs. 3 million, Rs. 1.2 million were charged to provision for doubtful debts and the balance amount was charged to profit and loss account.

12 Jan Goods costing Rs. 2 million and cash of Rs. 1.5 million were withdrawn by the owner for his personal use.

16 Jan Fixed assets having WDV of Rs. 2.6 million were sold for Rs. 3 million.

20 Jan Goods costing Rs. 8 million were purchased. Amount of Rs. 4.8 million had been paid in advance previously whereas the balance of Rs. 3.2 million was paid on delivery.

25 Jan Goods costing Rs. 8 million sold on cash for Rs. 9.5 million. 28 Jan Repayment of long-term loan installment comprising of principal and interest

amounting to Rs. 3 million and Rs. 0.8 million respectively.

ANSWER 09

CNA = ONA + CI + P – D 740,000 = 670,000 + 40,000 + 250,000 – 220,000

ANSWER 10

ONA = CNA – CI – P + D 830,000 = 950,000 – 290,000 – (-20,000) + 150,000



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ICAP OBJECTIVE BASED QUESTIONS 01. A business has capital of Rs.10,000.

Which of the following asset and liability figures could appear in this business’s statement of financial position?

Assets (Rs.) Liabilities (Rs.) (a) 6,000 16,000 (b) 6,000 4,000 (c) 10,000 10,000 (d) 14,000 4,000 02. Which of the following is incorrect? Assets (Rs.) Liabilities (Rs.) Capital (Rs.) (a) 7,850 1,250 6,600 (b) 8,200 2,800 5,400 (c) 9,550 1,150 8,200 (d) 6,540 1,120 5,420 03. Stock worth Rs. 5,000 is sold for Rs. 8,000. The complete effect of this transaction on the

accounting equation will be? (a) Profit will be increased by Rs. 3,000 (b) Stock will decrease by Rs. 5,000, cash will increase by Rs. 8,000 & profit will increase

by Rs. 3,000 (c) Stock will decrease by Rs. 5,000, & profit will increase by Rs. 8,000 (d) Cash will increase by Rs. 8,000 & profit will increase by Rs. 3,000 04. Goods which originally cost Rs. 400 were sold for Rs. 550. In the accounting equation Net

Assets will? (a) Rise by Rs. 550 (b) Rise by Rs. 150 (c) Fall by Rs. 550 (d) Fall by Rs. 150 05. At beginning of the month; Aslam has opening capital of Rs. 16,500, closing capital Rs. 11,350,

and drawings were Rs. 3,300. What is the amount of profit or loss for the month?

(a) Loss for the year was Rs. 1,850 (b) Profit for the year was Rs. 1,850 (c) Loss for the year was Rs. 8,450 (d) Profit for the year was Rs. 8,450 06. A business receives an accountant’s bill of Rs. 150,000.

Which of the following statements correctly shows the effect upon the accounting equation of the business, assuming the bill is unpaid?

(a) Assets decrease, Liabilities increase (b) Capital decrease, Liabilities increase (c) Capital increase, Liabilities decrease (d) Assets decrease, Capital decrease 07. The owner of a business withdrew Rs. 10,000 from cash for his personal use.

What would be the effect of this transaction on the accounting equation? (a) Assets increase, capital decreases (b) Assets decrease, Liabilities increase (c) Assets decrease, Capital decrease (d) Assets decrease, Capital increases



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08. John introduces his car into his business. Which parts of the business accounting equation will change?

(a) Capital and profit (b) Assets and capital (c) Capital and liabilities (d) Liabilities and assets 09. Asif provided following balances at end of July 2018:

Rs. Cash 45,000 Account payable 30,000 Office equipment 21,000 Capital 77,000.

What is the amount of trade receivables at that date?

(a) Rs. 62,000 (b) Rs. 11,000 (c) Rs. 41,000 (d) Rs. 86,000 10. Sattar has following assets and liabilities at 31stJuly 2018:

Rs. Building 15,000 Trade receivables 7,500 Cash 3,500 Trade payables 5,000

During the month he has earned profit of Rs. 7,200 and made drawings of Rs. 2,750. What is the opening balance of his capital account as at 1st July 2018?

(a) Rs. 25,450 (b) Rs. 21,000 (c) Rs. 26,000 (d) Rs. 16,550 11. What is the value of liabilities in an accounting equation with the help of given data?

Rs. Furniture 90,000 Cash 100,000 Debtors 11,000 Owner’s equity 90,000

. (a) Rs. 201,000 (b) Rs. 111,000 (c) Rs. 290,000 (d) Rs. 291,000 12. During a reporting period, a company’s assets increase by Rs. 80,000,000. Liabilities decrease

by Rs. 20,000,000. What should be the change in capital of the company?

(a) Increase by Rs. 60,000,000 (b) Increase by Rs. 100,000,000 (c) Decrease by Rs. 60,000,000 (d) Decrease by Rs. 100,000,000


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13. The liabilities of a business are Rs. 30,000; the capital of the proprietor is Rs. 70,000. The total assets are?

(a) Rs. 100,000 (b) Rs. 40,000 (c) Rs. 70,000 (d) Rs. 30,000 14. Which of the following will be affected in an accounting equation, if the goods are sold on credit

to a customer? (a) Cash and capital (b) Accounts receivable and capital (c) Cash and accounts receivable (d) Accounts payable and capital 15. The favourable balance of profit and loss should be? (a) Added in liabilities (b) Subtracted from current assets (c) Subtracted from liabilities (d) Added in capital 16. At 1 January 2018 Aisha’s business assets were valued at Rs. 360,000 and her liabilities

amounted to Rs. 240,000. At 31 December 2018, her assets amounted to Rs. 570,000 and include her private car which she had brought into the business on 1st November when it was valued at Rs. 190,000. Her trade payables at 31 December totaled Rs. 170,000 and her drawings during the year were Rs. 27,000. Aisha’s profit for the year to 31 December was:

Rs. ___________

17. Farhan had net assets of Rs. 190,000 at 30 April 2017. During the year to 30 April 2018, he

introduced Rs. 98,000 additional capital into the business. Profits were Rs. 80,000, of which he withdrew Rs. 40,200. What was the capital of Farhan at 30 April 2018?

Rs. ___________

18. The following transactions relate to Mujahid’s business:

Rs. 000 1 May Purchase of goods for resale on credit 1,300 2 May Mujahid injects long term capital into the business 1,400 3 May Payment of rent made 750 5 May Mujahid withdraws cash from the business 400 7 May Sales made on credit 1,200

The goods sold on 7th May originally cost Rs. 600,000. At the start of the week, the assets of the business were Rs. 15,700,000 and liabilities amounted to Rs. 11,200,000. At the end of the week, what is the amount of Mujahid’s capital?

Rs. ___________

19. A business had opening capital of Rs. 116,500, closing capital Rs. 111,350, and drawings were

Rs. 13,300. What is the amount of profit for the year?

Rs. __________



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20. Aiman has closing capital of Rs. 25,500 at 31stJanuary 2019. She introduced additional capital of Rs. 12,000 during the month. Profit for the month was Rs. 6,500 and drawings for the month were Rs. 3,000.

What is the amount of opening capital as at 1st January 2019?

Rs. __________ 21. The correct form of accounting equation is (a) Assets + Liabilities = Equity (b) Assets – Liabilities = Equity (c) Assets – Trade payables= Equity (d) Assets + Receivable = Equity 22. An entity (with 31 December year-end) has bought the machine for Rs.1,000,000 with the down

payment of Rs.200,000and remaining payment Rs.800,000 would be made after a month. The transaction happened in 15 December 2011.

What would be the effect on the of transaction? (a) Machine increased by Rs.800,000 and liabilities decreased by Rs.800,000 (b) Machine decreased by Rs.800,000 and liabilities increased by Rs.800,000 (c) Machine increased by Rs.1,000,000 and liabilities increased by Rs.800,000 while cash

is decreased by Rs.200,000 (d) Machine increased by Rs.800,000 and liabilities increased by Rs.800,000 while cash is

decreased by Rs.200,000 23. As per accrual concept, which of the followings is not true (a) Revenue – expenditure = profit (b) Revenue – profit = expenditure (c) Sales + gross profit = revenue (d) Revenue = profit + expenditure 24. Purchase of machinery for cash (a) Increases total assets (b) Decreases total assets (c) Increases assets and liabilities (d) Keeps total assets unchanged 25. Expenses paid by a business decrease: (a) Cash (b) Capital (c) Cash and capital (d) Capital and Accounts payable 26. Current assets – current liability =? (a) Capital (b) Total assets (c) Net assets (d) Net working capital 27. The investment of cash into the business results in a/an (a) Increase in cash and a decrease in capital (b) Increase in cash and an increase in capital (c) Decrease in cash and an increase in capital (d) Increase in fees earned and an increase in capital 28. Services rendered for cash will result in a/an (a) Increase in cash and a decrease in capital (b) Increase in cash and an increase in fees earned (c) Decrease in cash and an increase in fees earned (d) Increase in fees earned and an decrease in capital


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29. If during the accounting period the assets increased by Rs.7 million, and the owner's equity decreased by Rs.3 million, then the liabilities must have;

(a) Increased by Rs.10 million (b) Increased by Rs.4 million (c) Decreased by Rs.4 million (d) Decreases by Rs.10 million 30. One of the local fast-food outlets hired a first-year accounting student to oversee the cash-

collection procedures. When the firm pays the student his weekly wage, the transaction will

(a) Increase an asset, increase a liability (b) Decrease an asset, decrease a liability (c) Increase an asset, increase owner's equity (d) Decrease an asset, decrease owner's equity 31. QK Company records the transaction as a debit to Consultant Expense for Rs.500,000 and an

equivalent credit to Accounts Payable. What would be impact on accounting equation?

(a) Increase a liability, increase owner’s equity (b) Decrease an asset, decrease a liability (c) Increase a liability, decrease owner's equity (d) Decrease an asset, decrease owner's equity 32. Which of the following will cause owner's equity to increase? (a) Revenue (b) Expense (c) Drawings (d) Asset’s depreciation 33. The owner contributes his personal car to the business (a) Increase an asset, increase a liability (b) Decrease an asset, decrease a liability (c) Increase an asset, increase owner's equity (d) Decrease an asset, decrease owner's equity 34. The company purchases a significant amount of office supplies on credit (a) Decrease an asset, decrease a liability (b) Increase an asset, increase owner's equity (c) Decrease an asset, decrease owner's equity (d) Increase an asset, increase a liability



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OBJECTIVE BASED ANSWERS

01. (d) Capital = Assets – liabilities

02. (c) Rs. 9,550 – 1,120 = 8,400

03. (b)

04. (b)

05. (a) Closing capital = Opening capital + profit – drawings

Rs. 11,350 = Rs. 16,500+ profit – 3,300

Loss = Rs. 1,850

06. (b) Expense payable is recorded

07. (c)

08. (b)

09. (c) Total assets = Capital + Liabilities = Rs. 77,000+Rs. 30,000= Rs. 107,000

Trade receivables = Rs. 107,000-Rs. 21,000-Rs. 45,000 = Rs. 41,000

10. (d) Closing capital = Rs. 15,000+7,500+3,500 – 5,000 = Rs. 21,000

Opening capital = Closing capital + Drawings – Profit

= Rs. 21,000+2,750-7,200 = Rs. 16,550

11. (b) Liabilities = Rs. 90,000 + 100,000 + 11,000 - 90,000= Rs. 111,000

12. (b)

13. (a) Assets = Capital + Liabilities

14. (b)

15. (d)

16. Rs. 117,000

Opening capital =Rs. 360,000-240,000 = 120,000

Closing capital = Rs. 570,000 - 170,000 = 400,000

Closing capital = Opening capital + profit + capital introduced – drawings

400,000 = 120,000 + 190,000 + profit – 27,000

Profit = 117,000

17. Rs. 327,800

Capital = 190,000 + 98,000 + 80,000- 40,200 = Rs. 327,800

18. Rs. 5,350,000

Opening capital = Rs. 15,700,000 - 11,200,000= Rs. 4,500,000

Closing capital = Opening capital + capital injected +profit – drawings

Closing capital = Rs. 4,500,000 +1,400,000 + [1,200,000 – 600,000 – 750,000] – 400,000

Closing capital = Rs. 5,350,000



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19. Rs. 8,150 Profit = Closing capital + drawings – opening capital

= 111,350 + 13,300 – 116,500 = Rs. 8,150

20. Rs. 10,000

Opening capital = closing capital + drawings – profit – capital introduced

= 25,500 + 3,000 – 6,500 – 12,000 = Rs. 10,000

21. (b)

22. (c)

23. (c)

24. (d)

25. (c)

26. (d)

27. (b)

28. (b)

29. (a)

30. (d)

31. (c)

32. (a)

33. (c)

34. (d)

caf 1 – accounting equation accounting equation...

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