CHAPTER 4

ACCOUNTING EQUATION

ASSIGNMENT

Identification

1. The basic accounting equation is Assets = Liabilities + Owner’s Equity.

For each of the transactions in items 2 through 9, indicate the two (or more) effects

(increase, decrease or no effect) on the accounting equation of the business or

company.

2. The owner invests personal cash in the business.

Assets: Increase

Liabilities: No Effect

Owner’s Equity: Increase

3. The owner withdraws cash from the business for personal use.

Assets: Decrease
Liabilities: No Effect

Owner’s Equity: Decrease

4. The company receives cash from a bank loan.

Assets: Increase

Liabilities: Increase

Owner’s Equity: No Effect

5. The company repays the bank that had lent money to the company.

Assets: Decrease

Liabilities: Decrease

Owner’s Equity: No Effect

6. The company purchases equipment with its cash.

Assets: No Effect

Liabilities: No Effect

Owner’s Equity: No Effect

7. The owner contributes his/her personal truck to the business

Assets: Increase

Liabilities: No Effect

Owner’s Equity: Increase

8. The company purchases a significant amount of supplies on credit.

Assets: Increase

Liabilities: Increase

Owner’s Equity: No Effect

9. The company purchases land by paying half in cash and signing a note payable

for the other half.

Assets: Increase

Liabilities: Increase

Owner’s Equity: No Effect

10. Which of the following will cause owner's equity to increase?

a) Expenses b) Owner’s Withdrawals c) Revenue

11. Which of the following will cause owner's equity to decrease?

a) Net Income b) Net Loss c) Revenue

12. The financial statement with a structure that is similar to the accounting equation

is the Balance Sheet.

13. The financial statement that reports the portion of change in owner's equity

resulting from revenues and expenses during a specified time interval is the Income

Statement.

14. The financial statement that reports the financial performance of the business is

the Balance Sheet.

15. The financial statement that shows the inflows and outflows of cash is the Cash

Flow Statement.

II. Compute for the required amount.

ASSETS LIABILITIES EQUITY

1 700 000 300 000 400 000

2 800 000 350 000 450 000
3 320 000 140 000 380 000
4 850 000 390 000 460 000
5 430 000 520 000

INCOME EXPENSES NET INCOME (LOSS)

6 800 000 420 000 380 000

7 820 000 470 000 350 000
8 360 000 120 000 120 000
9 650 000 720 000 (70 000)
10 820 000 950 000 (130 000)