Page 52 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes 5.4 Keywords

Accounting Equation: The recording of business transactions in the books of account is based on
a fundamental equation called Accounting Equation.
Asset: Any physical thing or right owned that has money value is an asset.
Liability: It means the amount which the firm owes to outsiders that is, accepting the

proprietors.
Stock: The goods purchased are for selling, if the goods are not sold out fully, a part of the total
goods purchased is kept with the trader unlit it is sold out, it is said to be a stock.
5.5 Self Assessment

Fill in the blanks:
1. The basic accounting equation is the foundation for the ....................................... system.
2. A .................................... reports what a business owns (assets), what it owes (liabilities) and
what remains for the owners (equity) as of a certain date.
3. An owner’s investment into the company will increase the company’s assets and will also
increase .........................................
4. Accounting Equation serves as a basis for preparing ....................................
5. Liabilities = ................... – Capital
Choose the appropriate answers:
6. The basic accounting equation is Assets = Liabilities + Equity. The Equity term of the
equation can be further broken down into several other terms. Assume that the entity is a
sole proprietorship. Which of the following statements is correct?
(a) Additional investments by the business owner will increase equity; and revenues
will decrease equity.
(b) Additional investments by the business owner will decrease equity; and revenues
will increase equity.
(c) Increases in expenses will decrease equity; and owner withdrawals will decrease
equity.
(d) Revenues will increase equity; and owner withdrawals will increase equity.
(e) Revenues will decrease equity; and owner withdrawals will increase equity.
7. If at the end of the accounting period the company’s liabilities total ` 19,000 and its equity
totals ` 40,000, then what must be the total of assets?

(a) ` 14,000 (b) ` 40,000
(c) ` 21,000 (d) ` 59,000
(e) None of the above
8. If during the current accounting period the company’s assets increased by ` 24,000 and
equity increased by ` 5,000, then how did liabilities change?
(a) Increased by ` 29,000 (b) Increased by ` 24,000
(c) Decreased by ` 5,000 (d) Decreased by ` 19,000
(e) Increased by ` 19,000

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