Definition of Double Entry System

This is the system where each transaction is recorded in the books twice, once on
the debit side and once on the credit side.

Under double entry book- keeping, the debit and credit aspects (receiving and
giving) involved in each transaction are taken for recording. The double entry
system maintains the principle that every debit has a corresponding credit.

The Accounting Equation

Financial accounting is based upon a very simple idea called the accounting
equation.

The simple accounting equation says that:

Assets = Capital
If there are liabilities also, then the accounting equation is:
Assets = Capital + Liabilities (or)
Capital = Assets – Liabilities (or)
Liabilities = Assets – Capital

Assets = Liabilities + Capital (Owner’s equity) + Profit

Assets = Liabilities + Owner’s equity + Revenues – Expenses
Assets + Expenses = Liabilities + Owner’s equity + Revenues.

Assignment Questions
Select the correct answer
Q. 1 Assets are equal to:
(a) Capital + Liabilities (b) Liabilities – Capital
(c) Capital – Liabilities (d) None of these

Q. 2 The accounting equation can be expressed in a financial statement called the

(a) trading a/c (b) profit & loss a/c (c) balance sheet (d) ledger.

Q. 3
Assets Liabilities Capital
75,500 ? 21,240

Q. 4 Given the following: Building $ 26,000; Stock in Trade $ 14,600;

Trade Debtors $ 9,400; Trade Creditors $ 21,000; Bank balance $ 7,000;
Cash in hand $ 5,000; Loan from Indu $ 30,000; Motor Vehicles $ 40,000
What is the amount of Capital?
(a) $ 51,000 (b) $ 44,000 (c) $ 37,000 (d) None of these.
Q. 5 In a business the total assets amounted to $20000. Total liabilities
amounted to $4000. What does the difference between these two represent?
(a) Current assets (b) Fixed assets (c) Capital (d) None of these

Q. 6 Which one of the following statements is correct?

(a) Liabilities + assets = capital
(b) Assets + liabilities = capital
(c) Liabilities – capital = asset
(d) Assets – Liabilities = capital

Q. 7 B, Blake started business and deposited $5,000 into bank

What is the effect of this transaction?
A. Only bank increase B. Only capital increases
C. Capital increases, bank decreases D. Both bank and capital increases

Q. 8 On 30 May 2005, Akram balance sheet shows the following balances

Buildings $ 15,000 Cash at bank $5,000
Capital $ 4,000 Creditors $ 500
On the same day he buys a building for $ 3,000 paying by cheque. What will be the
value of total assets?
A. $ 20,000 B. $ 18,000 C. $ 17,000 D. $ 23,000

Q. 9 Jean paid a cheque $ 300 to D.Smith. Which is correct in D.Smith’s Balance sheet?
A. Bank will decrease only B. Creditor will decrease only
C. Debtor will decrease only D. Bank will increase and debtor will decrease

Q.10 X sold the furniture $ 2,000 to Y. Y paid the amount by cheque.How will it effect
X’s balance sheet?
A. Fixed assets decreases and bank increases
B. Only bank increases
C. Bank decreases and fixed assets increases
D. Current assets decreases and fixed assets increases

Q.11 C. John has the following items in his balance sheet as on 30th April 2005.
Capital $ 20,900, Fixtures $ 3,500, Stock $ 4,950, Debtors $ 13,280 and Cash $
6,450. What is the amount of total liabilities?
A. $ 20,900 B. $ 28,180 C. $ 7, 280 D. $ 17,400

Q. 12 From the following information calculate the amount of Capital for the
year ended 31st March 2001.
$ $
Plant & Machinery 40,000 Stock of goods 15,000
Land 25,000 Debtors 12,000
Furniture & Fixtures 35,000 Creditors 18,000
Bank loan 20,000
Q. 13 From the following information calculate the amount of Liabilities for the
year ended 31st October 2001.
$ $
Plant 42,000 Stock of goods 8,000
Machinery 25,000 Cash at Bank 12,000
Land 20,000 Capital 99,000
Furniture & Fixtures 14,000

Q. 14 From the following information calculate the amount of assets for the year
ended 31st December 2001:
$ $
Bank Overdraft 2,700 Bank Loan 40,000
Creditors 21,000 Capital 86,000

Q. 15 Complete the gaps in the following table:

Assets liabilities capital

$ $ $
1 19,000 3,600 ?
2 28,000 ? 14,000
3 ? 15,000 12,000
4 ? 40,000 4,000
5 30,000 14,000 ?
6 44,000 10,000 ?
7 66,000 ? 46,000
8 46,000 ? 15,000
9 ? 33,000 16,000

Q. 16 Fill in the following with the correct terms

Capital = ----------------- - -----------------

Q 17 Draw a table to show the effect of the following transactions on the assets, liabilities
and capital.
a. Started business with cash $ 5 000
b. Deposited cash in the bank account $ 3 000
c. Bought goods on credit from Samson for $ 2 000
d. Sold goods on credit to Ramson for $ 2 500
e. Purchased a motor car from Universal Motors on credit for $ 3 500
f. Bought furniture for $ 500 and paid by cheque
g. Paid Universal Motors by cash
h. Received cheque from Ramson for $ 1 500
i. Paid office expenses in cash $ 100
j. Received commission from Tom by cheque $ 250
Q 18 Draw a table to show the effect of the following transactions on the assets, liabilities
and capital.
a. Started business with cash $ 20 000
b. Deposited cash into bank account $ 10 000
c. Purchased goods on credit from B. Blue $ 8 000
d. Credit sales to Y. Yellow $ 12 000
e. Paid salaries by cheque $ 500
f. Bought fittings by cash $ 1000
g. Paid B. Blue by cash $ 5 000
h. Received a cheque from Y. Yellow $ 8 000
i. Withdrew $ 300 from the bank for personal use
j. Took $ 1 000 from the cash till and put into bank

Q 19 Draw a table to show the effect of the following transactions on the assets, liabilities
and capital.
a. Started business with $ 2 000 in cash.
b. Paid $ 1 800 of the opening cash into the bank account for the business.
c. Bought office furniture on credit from Better Furniture for $ 120.
d. Bought a motor van paying by cheque $ 150.
e. Bought works machinery from Evansons on credit $ 160.
f. Returned faulty furniture costing $ 62 to Better Furniture.
g. Sold some of the works machinery for $ 75 cash.
h. Paid amount owing to Better Furniture $ 58 by cash.
i. Took $ 100 out of bank and put it in cash till.
J. J. Smith lent us $ 500- Giving us money by cheque.

Q 20 Show the effect of the following transactions on the assets, liabilities and capital.
a. Started business with cash $ 2 000.
b. Received a loan of $ 5 000from Micky by cheque.
c. Bought machinery for cash $ 200.
d. Bought office equipment on credit from Goodview Ltd. For $ 800.
e. Took $ 300 out of bank and put it into the cash till .
f. Repaid part of Micky’s loan by cheque $ 2 000.
g. Paid amount owing to Goodview Ltd. $ 800 by cheque.
h. Repaid part of Micky’s loan by cash $ 500.
i. Bought additional machinery on credit from Donald for $ 1 500.