Chapter 2: The Accounting Equation

Question 1

What is the Accounting Equation?

Answer 1

ASSETS = LIABILITIES + EQUITY

Question 2

How do we calculate Capital?

Answer 2

OPENING CAPITAL + PROFIT + CAPITAL INJECTIONS - DRAWINGS

Question 3

With our understanding of capital, how else can we write the Accounting Equation?

Answer 3

ASSETS - LIABILITIES = OPENING CAPITAL + PROFIT + CAPITAL INJECTIONS - DRAWINGS

Question 4

What is the double entry for:
- Tom buys a car for £3000 cash from the business bank account

Answer 4

Dr Motor Vehicles Expense
Cr Cash

Question 5

What is the double entry for:
- Dora starts her business with £20,000, paid into a new business account

Answer 5

Dr Cash
Cr Capital

Question 6

What is the double entry for:
- Rita buys inventory on credit for £1,000

Answer 6

Dr Inventory
Cr Trade Payables

Question 7

Inventory and duality concept:
- what happens if inventory is sold for more than its cost?

Answer 7

The business has made a profit, therefore capital increases

Question 8

Inventory and duality concept:
- What would happen if we sell inventory for less than it cost?

Answer 8

The business has made a loss, therefore capital decreases

Question 9

What is the equation for Cost of Sales?

Answer 9

CoS = Opening Inventory + Purchases - Closing Inventory