Module 2 - THE ACCOUNTING EQUATION AND THE RULES OF

DEBIT AND CREDIT

PROBLEM 2-1 MULTIPLE CHOICE

Classify the accounts according to accounting elements and their effects to the
accounting equation.
Effects INCREASE (DECREASE) on
LIABILIT
ASSET CAPITAL
Accounting Elements Y
1. Accounts receivable
a. Asset Increase
b. Liability
c. Owner's equity
d. Revenue
e. Expense
2. Allowance for doubtful accounts
a. Asset Decrease
b. Liability
c. Owner's equity
d. Revenue
e. Expense
3. Interest income receivable
a. Asset Increase
b. Liability
c. Owner's equity
d. Revenue
e. Expense
4. Bank charges
a. Asset
b. Liability
c. Owner's equity
d. Revenue
e. Expense Decrease
5. Accrued expenses
a. Asset
b. Liability
c. Owner's equity
d. Revenue
e. Expense Decrease

6. Bank overdraft
a. Asset
b. Liability Increase
c. Owner's equity
d. Revenue

e. Expense

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7. Notes payable
a. Asset
b. Liability Increase
c. Owner's equity
d. Revenue
e. Expense
8. Bad debts
a. Asset
b. Liability
c. Owner's equity
d. Revenue Decrease
e. Expense
9. Interest income
a. Asset
b. Liability
c. Owner's equity
d. Revenue Decrease
e. Expense
10. Rent deposit
a. Asset Increase
b. Liability
c. Owner's equity
d. Revenue
e. Expense
11. Decline in value of inventory
a. Asset Decrease
b. Liability
c. Owner's equity
d. Revenue
e. Expense
12. Gain on sale of investments
a. Asset
b. Liability
c. Owner's equity
d. Revenue Increase
e. Expense
13. Prepaid insurance
a. Asset Increase
b. Liability
c. Owner's equity
d. Revenue
e. Expense

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 PROBLEM 2-2 ACCOUNTING EQUATION
Using the accounting equation, answer the following independent cases:
1. The total assets of Beauty Enterprises are $700,000 and its
$280,000 owners’ equity is $420,000. What is the amount of its
liabilities?
2. The total liabilities of Handsome Enterprises are $200,000 and
$500,000 the owner’s equity is $300,000. What is the amount of its total
assets?
3. The total assets of Pretty Services are $800,000 and its
$480,000 liabilities are equal to 40% of its total assets. How much is the
amount of the owner’s equity?
4. The total owner’s equity of Cute Servicing amounts to
$250,000 and the total liabilities are $150,000. How much is the
$350,000 total assets if $50,000 was withdrawn by the owner for his
personal use?
5. The total liabilities of Bright Enterprise are $1,200,000
$6,000,000 representing one-fourth of the total equity. How much is the
amount of its total assets?
6. The total owner’s equity of Brilliant Enterprises are $900,000
$630,000 representing 30% of the total assets. How much is the amount of
its total liabilities?
7. At the beginning of the year, Wise Vulcanizing had total assets
of $50,000 and total liabilities of $15,000. If the total assets
increased by $30,000 and the total liabilities decreased by
$75,000 $10,000 during the year, what is the amount of the owner’s
equity at the end of the year?
8. At the beginning of the year, Alas Computer had total assets of
$100,000 and total liabilities of $75,000. If the total liabilities
decreased by $40,000 and the total equity increased by $50,000
$110,000 during the year, what is the amount of total assets at the end of
the year?
9. At the beginning of the year, Sharp Store had total assets of
$200,000 and total liabilities of $125,000. If the total assets
decreased by $80,000 and owner’s equity increased to
$75,000 P120,000 during the year, what is the amount of total liabilities
at the end of the year?
10. At the end of the year, Fast Fastfood had total assets of
$600,000 and total liabilities of $130,000. If the total assets
decreased by $80,000 and owner’s equity increased by
$330,000 $120,000 during the year, what is the amount of total liabilities
at the beginning of the year?

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PROBLEM 2-3 ACCOUNTING EQUATION

Instructions:

Indicate with the appropriate letter whether each of the transactions below results
in:

(a) An increase in assets and a decrease in assets.

(b) An increase in assets and an increase in owner’s equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in owner’s equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owner’s equity.
(g) An increase in owner’s equity and a decrease in liabilities.

GETT Bookstore entered into the following transactions during October 2020:

C 1. Purchased furniture for $25,000 from Barn Furniture House on

account.
D 2. Paid $10,000 cash for October rent on store space.
B 3. Received $35,000 cash from customers from sales.
B 4. Provided office supplies to MM University for $30,000 cash.
D 5. Paid $1,500 for electricity used for the month of October.
6. (B) Invested additional $60,000 in the business.
7. (E) Paid 75% for transactions number 1.
F 8. Incurred salary expense on account for $18,000.
9. Received $4,000 from customer as advanced payment for supplies with
C special specifications.
G 10. Delivered the special order in number 9.

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PROBLEM 2-4 ACCOUNTING EQUATION

Supply the missing amount for each independent case.

CASE ASSETS LIABILITY CAPITAL REVENUE EXPENSE
1 $100,000 $40,000 $60,000 $0 $0
2 $140,000 20,000 120,000 0 0
3 120,000 $40,000 80,000 0 0
4 150,000 60,000 40,000 90,000 $40,000
5 200,000 50,000 100,000 $110,000 60,000
6 220,000 $110,000 120,000 100,00 110,000
7 $250,000 100,000 120,000 150,000 120,000
8 $420,000 150,000 200,000 160,000 90,000
9 $360,000 60% 144,000 0 0
10 400,000 $80,000 80% 0 0
11 500,000 40,000 $360,000 130,000 30,000
12 $830,000 30,000 700,000 200,000 100,000
13 1,200,000 250,000 $970,000 400,000 420,000
14 $1,900,000 800,000 1,200,000 2,000,000 2,100,000
15 $100,000 35,000 65% 0 0

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PROBLEM 2-5 ACCOUNTING EQUATION

Using the accounting equation, compute and fill up the amount of an account.

Case Accounts Amount

1 Cash $50,000
Accounts receivable $70,000
Accounts payable 60,000
Owner’s capital 60,000

2 Cash $120,000
Sales 180,000
Expenses $150,000
Accounts payable 40,000
Owner's capital 50,000

3 Cash $20,000
Accounts receivable 80,000
Accounts payable 15,000
Notes payable 10,000
Operating expense 150,000
Service income 175,000
Owner's capital $50,000

4 Cash $10,000
Accounts receivable 40,000
Interest payable 1,000
Professional fee $9,000
Notes payable 5,000
Owner's drawing 10,000
Owner's capital 45,000

5 Rent income $10,000

Unearned interest income 1,000
Unused supplies 500
Cash 20,000
Supplies expense 1,500
Accrued salaries payable $11,000
Owner's capital 10,000

Note: Present your supporting computation in a separate sheet of two-column

journal.

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 PROBLEM 2-6 ACCOUNTING EQUATION

Give one business transaction for the given effects on accounting elements
as described below:

a. Increase in one asset and decrease in another asset

b. Increase in asset and increase in liability
c. Increase in asset and increase in owner’s capital
d. Increase in asset and increase in revenue
e. Decrease in one liability and increase in another liability
f. Increase in expense and increase in liability
g. Increase in expense and decrease in asset
h. Decrease in owner’s capital and decrease in asset
i. Increase in expense and decrease in owner’s capital
j. Decrease in liability and increase in owner’s capital

Answers:

Business Transactions
a. Received payment from customers on account

b. Received payment in advance from customers

c. Capital intriduced by owner

d. Provided services on account

e. Bills payable issued to creditors.

f. Received electric bill for the month’s electric consumption, payable next month

g. paid wages earned this week

h. drawings (withdrawn by partners ) ie, decrease in capital ad decrease in cash

i. Pay expense with stock

j. Conversion of debentures into shares.

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 PROBLEM 2-7 ACCOUNTING EQUATION

Indicate opposite each transaction number the effect on each accounting

element by placing debit or credit under each respective column affected. If only
one accounting elements is affected, indicate D = C.

Transactions:

1. Depreciation in the bank the available cash on hand.

2. Issued check to pay the personal expense of the owner.
3. Issued promissory note as payment for equipment acquired.
4. Received debit note from the bank for bank charges for the month.
5. Collected some of the accounts receivable.
6. Received additional investment from the owner.
7. Received electric bill for the month’s electric consumption, payable next
month.
8. Paid water consumption of previous month which was recorded as
accounts payable.
9. Withdrew some amount from the bank deposit.
10. Issue promissory note to replace outstanding accounts payable.

ANSWERS

No. Asset Liabilities Equity Revenue Expense

1
2 C D
3 D C
4 C D
5 D=C
6 D C
7 C D
8 C D
9 D=C
10 D=C

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