CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 1

MULTIPLE-CHOICE QUESTIONS

1 The performance of a service on credit will

A increase assets
B increase owner’s equity
C have no effect on liability
D All of the above

2 Which of the following accounting procedures are correct?

Accounts Effects Entries in account

An increase Debit
I Assets
A decrease Credit
An increase Debit
II Owner’s equity
A decrease Credit
An increase Debit
III Expenses
A decrease Credit
An increase Debit
IV Revenue
A decrease Credit
An increase Credit
V Liabilities
A decrease Debit

A I, II and III
B I and V
C II and IV
D I, III and V

3 Owner’s equity will decrease when

I the business obtains net profit

II the business incurs net loss
III there is an additional capital from the owner
IV the owner pays the business debt using his own pocket money
V the owner takes business goods for personal use

A II only
B II and V
C I, III and IV
D II, IV and V

4 Which of the following changes will NOT occur as a result of a business

transaction in the bookkeeping records?

A increase in assets and increase in liability

B increase in assets and increase in owner’s equity
C increase in owner’s equity and increase in liability
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 2

D increase in owner’s equity and decrease in liability

5 What is the effect on assets, liabilities and owner’s equity when the owner invests
cash in his business?

A Liabilities increase and owner’s equity decrease

B Both assets and liabilities increase
C Both assets and liabilities decrease
D Both assets and owner’s equity increase
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 3

THEORY QUESTIONS
1. Differentiate the following:
a) Purchases and sales

PURCHASES SALES
Goods bought by the business for the Sale of goods which the business
purpose of reselling bought with the prime intention of
resale

b) Return inwards and return outwards

RETURN INWARDS RETURN OUTWARDS

Goods which we have sold and Goods which we purchased on credit
returned by the customer if returns back it

c) Debit note and credit note

DEBIT NOTE CREDIT NOTE

A document sent to the supplier to A document sent to the buyer to show
show the reduction in the amount the reduction in the amount owed by
owed to the supplier the buyer

2. What do you understand by the term ‘inventory’?

= Inventory is asset held for sale in the ordinary course of business.

3. State whether each of the following statements is TRUE or FALSE.

a) Furniture bought by a business for the purpose of resale is considered a

purchase and not a non-current asset. FALSE
b) An old van sold by a merchandising business is considered a sale transaction.
TRUE
c) A computer bought a computer vendor for the purpose of using it in the business
is considered as a purchase. TRUE
d) Return inwards means return of goods to the supplier. FALSE
e) Sale of furniture by Syarikat Perabot Abu will result in the increase of sales
revenue. TRUE

PROBLEM QUESTIONS
1. Show the effect of the following transactions upon the accounting equation and state
the double entry of the transactions.

Effects of transactions Double entry

No. Transactions
Increase Decrease Debit Credit
Started business with Asset,
a RM10,000 in the bank Owner’s Bank Capital
account. Equity
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 4

Effects of transactions Double entry

No. Transactions
Increase Decrease Debit Credit

Bought goods worth

Expense, Amirul Sdn.
b RM1,000 on credit from Cash
Liability Bhd.
Amirul Sdn. Bhd.

Bought goods from Ali and

c Expense Asset Ali Cash
paid RM500 by cheque.

Purchased a van worth

Asset, BMF
d RM15,000 using a loan Van
Liability Finance
from BMF Finance.

Sold goods worth RM2,000 Revenue,

e Hassan Sales
to Hassan on credit. Asset

Made a RM250 cash sales Revenue,

f Mutu Sales
to Mutu. Asset

Mutu returned goods and

Revenue,
g received RM20 cash Sales Mutu
Asset
refund.

The owner took RM100 Owner’s

h worth of goods for his own Equity, Drawing Cash
use. Aseet

Owner’s
The owner took RM200
i Equity, Drawing Cash
cash for his own use.
Asset

Returned goods worth Amirul Sdn.

j Asset Expense Cash
RM100 to Amirul Sdn. Bhd. Bhd.

Paid amount due of RM900

Asset, Amirul Sdn.
k by cheque to Amirul Sdn. Bank
Liabilty Bhd.
Bhd.

Hassan returned some

damaged goods worth
l Expense Asset Hassan Cash
RM50.
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 5

Effects of transactions Double entry

No. Transactions
Increase Decrease Debit Credit

Hassan paid the

m outstanding amount of Asset Asset Bank Hassan
RM1,950 by cheque.

Bought RM2,500 worth of

Computer
n computer equipment by Asset Asset Bank
Equipment
cheque.

The owner brought in his Asset,

o personal furniture worth Owner’s Furniture Capital
RM1,200 for the office use. Equity
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 6

2. Show the effect of the following transactions upon the accounting equation and state
the double entry of the transactions.

Effects of transactions Double entry

No. Transactions
Increase Decrease Debit Credit
Accounts receivable
Revenue, Return
a returned goods Debtor
Asset Inwards
purchased.

Paid cash for goods

b Expense Asset Purchase Cash
purchased.

Asset,
Owner took cash for
c Owner’s Drawing Cash
personal use.
Equity

Paid advertisement fees Advertisement

d Expense Asset Cheque
by cheque. Fees

Bought goods on credit Asset,

e Creditor Cash
from a supplier Liability

f Paid wages by cheque. Expense Asset Wages Bank

Bought office furniture Office

g Asset Asset Bank
and paid by cheque. Furniture

Asset, Interest on
Received cheque for
h Owner’s Bank Fixed
interest on fixed deposit
Equity Deposit

Transferred cash in hand

i Asset Asset Bank Cash
to bank account.
 CHAPTER 3: ACCOUNTING CLASSIFICATION AND ACCOUNTING EQUATION 7

3. Mafaz Trading started its business in 20X7. Given below are the extracts of business
transactions for October 20X8.

October Transactions
3 Brought additional cash of RM40,000 in bank and motor vehicles of
RM90,000 into the business.
4 Paid RM7,500 for goods purchased from Hannan Enterprise by cheque.
5 Received a cheque for RM15,000 from Sofea for invoice issued in
September 20X8.
9 Paid insurance of RM2,500 by cheque.
10 Returned defective goods worth RM250 to Hannan Enterprise and
reimbursement was settled by cash.
12 Received cash of RM7,500 for goods sold to Farha.
14 Paid the owner’s electricity bills of RM1,200 in cash.
16 Sold goods to Thoriq amounting to RM15,000 on credit.
20 Paid RM9,000 for utilities bills by cheque.
25 Paid wages of RM10,000 by cheque.

Required:

Show the effect of the above transactions upon the accounting equation and state the
double entry of the transactions.