Republic of the Philippines

North Eastern Mindanao State University

Poblacion, Marihatag, Surigao Del Sur, 8306
Website: www.sdssu.edu.ph
Marihatag Offsite

CHAPTER 3: THE ACCOUNTING EQUATION

Activity # 3

Name: ________________________________________________ Date: _________________

Section: _______________________________________________
Instructor: _____________________________________________

Problem 1. True or False. Write the word TRUE if the statement is correct and FALSE if the statement is wrong on the space
before the number.

1. All the processes in an accounting system must observe the equality of the accounting equation.
2. The basic accounting equation is Assets + Liabilities = Equity.
3. The terms “economic resource’ and ‘present obligation’ refer to ‘income’ and ‘expenses’, respectively.
4. When determining the existence of an asset, legal ownership is always a necessary factor to consider.
5. Control is an essential aspect in the definition of an asset. Control means legal ownership.
6. An entity controls an economic resource if it has the exclusive right to enjoy the economic benefits from
the resource, including the ability to prevent others from enjoying those benefits.
7. A property that you do not have the right to use, sell, lease, transfer, or other similar rights may not be
your asset, even if you are the legal owner of that property.
8. Legal obligations arise only from law.
9. A present obligation can result from a future event.
10. Equity is defined as a residual amount being the difference between total assets and total liabilities.
11. Income is defined as increases in assets or decreases in liabilities that result in an increase in equity,
other than those that relate to contributions by the business owner(s).
12. Both the definitions of income and expenses encompass changes in assets and liabilities but excluding
those changes that relate to business owner's investments to or withdrawals from, the business.
13. You own a business. Your business lacks capital so you provided additional cash. This transaction would
result to income by your business.
14. The difference between income and expenses is profit or loss. There is profit if income exceeds
expenses.
15. Physical possession is a necessary condition in order for control over an asset to exist.
16. An economic resource can produce economic benefits in many ways, including the potential of the
resource to provide the entity, directly or indirectly, with cash.
17. The settlement of a liability requires the transfer of an economic resource.
18. An intention to obtain control over an economic resource at a future time does not result to the
recognition of an asset at present.
19. Your business has total assets of P10M, total liabilities of P6M and total equity of P4M. This means that
out of the total P10M resources, you have provided P6M.
20. Income decreases equity, while expenses increase equity.
21. Total assets are P10. Total Liabilities are P6. Therefore, total equity is P4.
22. Total assets are P20. Total Liabilities are P16. Therefore, total equity is P36.
23. Total assets are P80. Total Liabilities are P60. Therefore, total equity is P20.
24. Total assets are P60. Total Liabilities are P30. Therefore, total equity is P30.
25. Total income is P100. Total expenses are P40. Therefore, the difference of P60 is a profit.
26. Total income is P50. Total expenses are P60. Therefore, the difference of P10 is a loss.
27. Beginning equity is P100. Profit during the period is P20. If there are no other changes in equity, the
ending balance of equity must be P120.
28. Beginning equity is P10. Loss during the period is P4. If there are no other changes in equity, the ending
balance of equity must be P6.
29. Total assets are P100. Total liabilities are P40. Total equity, before income and expenses, are P40.
Therefore, profit is P20,
30. Total assets are P100. Total liabilities are P60. Total equity, before income and expenses, is P30. If total
income is P50, total expenses must be P30.
 Republic of the Philippines
North Eastern Mindanao State University
Poblacion, Marihatag, Surigao Del Sur, 8306
Website: www.sdssu.edu.ph
Marihatag Offsite

Problem 2. Multiple Choice. Write the letter of your choice on the space before the number.

1. Which of the following is incorrect regarding the basic accounting equation?

A. Essentially all aspects of financial accounting, from recording to communicating financial information, involve
the observance of the equality of the basic accounting equation,
B. The basic accounting equation is ‘Assets = Liabilities + Equity’.
C. The basic accounting equation is an algebraic equation. Hence, other variations or relationships can be derived
from it.
D. The basic accounting equation is applicable only in basic accounting but not in higher accounting.
2. Which of the following is not an essential factor in determining the existence of an asset?
A. The presence of an economic resource that resulted from past events
B. Control over the economic resource
C. Potential of the economic resource to produce economic benefits for the entity
D. Present obligation
3. For a liability to exist there must be a present obligation along with the other aspects of a liability. A Present
Obligation exists if
A. the entity has already obtained economic benefits or taken an action, and as a consequence, the entity will or
may have to transfer an economic resource that it would not otherwise have had to transfer.
B. the entity is required by law to pay either the government or another party.
C. the entity has incurred a duty or responsibility, even if settling that duty or responsibility would not in any way
require the transfer of an economic resource.
D. the entity expects to enter into a future transaction wherein the entity would be required to pay cash or
transfer other resources,
4. Which of the following is incorrect concerning equity?
A. It is equal to Assets minus Liabilities
B. It is a residual amount.
C. It represents the business owner’s claim against the total economic resources
D. It is different from Capital, net assets or net worth.
5. Which if the following is not a correct variation of the expanded accounting equation?
A. Assets = Liabilities + Equity + Income – Expenses
B. Assets – Liabilities = Equity + Income – Expenses
C. Assets + Expenses = Liabilities + Equity + Income
D. Assets = Liabilities + Equity – Income + Expenses
6. Which of the following statements about income is incorrect?
A. It results from increases in assets or decreases in liabilities that result in increases in equity, except those that
pertain to the business owner’s contributions to the business.
B. It results to profit if it is greater than expenses.
C. It cannot result from decreases in assets or increases in liabilities.
D. It results in decrease in equity
7. An entity has total liabilities of P360,000 and total equity of P90,000. How much are the total assets?
A. 270,000 C. 360,000
B. 450,000 D. None of these
8. An entity has total assets of P360,000 and total equity of P90,000. How much are the total liabilities?
A. 270,000 C. 360,000
B. 450,000 D. None of these
9. An entity had a beginning equity of P123,000. If the total income for the period is P59,000, while the total
expenses are P81,000, how much is the ending balance of equity?
A. 130,000 C. 101,000
B. 110,000 D. None of these
10. An entity had total liabilities of 340,000 at the end of the year. The beginning equity is P280,000. If during the year,
the entity earned income of P420,000 and incurred expenses of P390,000, how much is the ending balance of total
assets?
A. 560,000 C. 780,000
B. 650,000 D. 960,000
 Republic of the Philippines
North Eastern Mindanao State University
Poblacion, Marihatag, Surigao Del Sur, 8306
Website: www.sdssu.edu.ph
Marihatag Offsite

Problem 3. Computation. Complete the missing amounts on the table.

ASSETS = LIABILITIES + EQUITY

1 460,000.00 190,000.00
2 230,000.00 70,000.00
3 990,000.00 130,000.00
4 1,020,000.00 410,000.00
5 820,000.00 580,000.00
6 7,800.00 290,000.00
7 990,000.00 270,000.00
8 890,000.00 170,000.00
9 1,420,000.00 360,000.00
10 1,920,000.00 890,000.00