Chapter 2 Accounting equation

Question 2.1 Suggested solution

Date Assets Equity Liabilities

= +
+ - - + - +
1 R 100,000 R 100,000

2 R 20,000
R 15,000
R 5,000 R 40,000

3 R 186 R 186
R 1,200 R 1,200

4 R 1,800 R 1,800
R 20 R 20

5 R 1,180 R 1,180

8 R 224 R 224

9 R 150 R 150
R 50 R 50

10 R 14 R 14

12 R 86 R 86

16 R 480 R 480

18 R 150 R 150

19 R 330 R 330

22 R 1,800 R 1,800

26 R - R -

29 R 150
R 500 R 350

29 R 150
R 1,550 R 1,700

30 R 1,800 R 1,800
R 1,800 R 1,800

31 R 20,000
R 15,000
R 5,000 R 40,000
Chapter 2 Accounting equation

Question 2.2 Suggested solution

1 A long-term loan to the amount of R100 000 was negotiated from ABSA.

2 Cheques were issued for the following payments:

Stationery R 115
Telephone R 228
Electricity R 305
(It is assumed that cheques are issued for bank payments)

3 Bank charges (according to the bank statement) amounted to R30.

4 Interest (according to the bank statement) amounting to R14 was earned on a presumably positive
bank balance.

5 Goods were sold for cash. (Cash received not deposited into bank account.)

6 Cash on hand deposited into bank account.

7 Goods were sold on credit.

8 A discount amounting to R50 was granted. The remaining outstanding amount was received
from the debtor./ settled by the debtor.

9 Goods were sold on credit for R350.

10 The above-mentioned outstanding amount was written off as irrecoverable. (The debtor was
presumably declared insolvent.)

11 Goods were sold for cash. (R740)

12 Refreshments amounting to R140 were paid for by cash. The remaining cash…(13)

13 The remaining cash was deposited into the bank account. (R700)

14 Goods were purchased on credit. (R514)

15 The above-mentioned outstanding amount (R514) payable was paid/settled.

16 Goods were purchased on credit. (R418)

17 A discount amounting to R41 was received. The remaining outstanding amount was paid.
(R377)

18 The owner used own funds to purchase stationery to the amount of R31.

19 Interest amounting to R1 114 accrued on the long-term liability.

presumably positive

was received

he debtor was
Chapter 2 Accounting equation

Question 2.3 Suggested solution

Journal Assets = Equity +

entry Dr Cr + - - +
1 Cash R 800
Debtors R 800

2 Furniture and equipment R 850

Bank/ Petty cash R 1,000
Office rent R 500
Owner's capital R 2,350

3 Furniture and equipment R 2,500

Creditors

4 Creditors
Bank R 180

5 Debtors R 4,800
Sales R 4,800

6 Wages R 350
Electricity R 500
Bank R 850

7 Bank R 4,560
Discount received R 240
Debtors R 4,800

8 Owner's salaries 2500

Creditors (Note 1)

Notes
1. Alternatively the owner's capital account could have been credited. (Equity increase)
 Liabilities
- +

R 2,500

R 180

2500
Chapter 2 Accounting equation

Question 2.4 Suggested solution

Part 1

1 From the definition it is evident that Equity represents Assets minus Liabilities. It could
therefore be concluded that it is the owner's/(s') share of the assets after the suppliers of
finance and other creditors' portion were subtracted. When a profit is generated, the owner
is going to benefit from it since the liabilities are going to be unchanged; likewise
when a loss is generated in the income statement, it is going to be the owner's loss since
the creditors won't be affected by the loss.

Income statement accounts should therefore be classified as Equity since:

- a profit is the owner's share of the income after expenses were subtracted
- a loss will be a disadvantage for only the owner (equity) and it won't have an effect on
either assets or liabilities
- the net effect of the income statement is carried over to accumulated income which
is classified as equity.

2 Account Equity = Assets + Liabilities

Sales +R100 000
Purchases -R50 000
Other expenses -R30 000
Capital +R10 000
Fixed assets +R25 000
Debtors +R20 000
Bank +R35 000
Creditors +R50 000
30,000 - -

Part 2
Assets are normally disclosed at cost price less accumulated depreciation
values.

When we are making a provision for doubtful debts, we are also acknowledging the fact
that 100% of the debtors might not be recovered, especially balances outstanding more
than 120 days when the average recovery period is 15 days.

The above-mentioned provisions are therefore made to give the reader of the financial
statements a so-called "realistic" picture of the business. It should be noted that in the
event of one or two of the above-mentioned provisions, only the net amount of the asset
is shown on the face of the balance sheet. In the event of a provision for depreciation,
only the carrying value of the asset is disclosed on the face of the balance sheet, and
in the event of a provision for doubtful debts, the amount disclosed on the face of the
balance sheet is actual outstanding debtors less the provision.

It could therefore be concluded that the mentioned provisions should be classified as

assets, since these accounts are used to decrease assets and due to the fact that
these accounts are closely related to assets. The classification is therefore:

Account Equity = Assets + Liabilities

Depreciation -12,400
Accumulated depreciation -12,400
Credit losses -3,500
Allowance for credit losses -3,500
Chapter 2 Accounting equation

Question 2.5 Suggested solution

Part 1 Dr Cr
R R
1 a Bank 2,100
Adoption income 2,100
(14 × R150)
b Bank 1,080
Shelter income 1,080
(18 × 3 × R20)
c Bank 1,500
Subsidy received 1,500
(15 × 20 × R5)
2 a Salaries and wages 3,500
Bank 3,500

b Animal food 1,700

Creditors 1,700

c Telephone 350
Creditors 350
Creditors 350
Bank 350

d Electricity 800
Creditors 800

Part 2 Assets = Equity + Liabilities

1 a +R2 100 = +R2 100 + R-

b +R1 080 = +R1 080 + R-
c +R1 500 = +R1 500 + R-
2 a -R3 500 = -R3 500 + R-
b R- = -R1700 + R 1,700
c R- = -R350 + +R350
-R350 = R- + -R350
d R- = -R800 + -R800
Chapter 2 Accounting equation

Question 2.6 Suggested solution

Date Account Assets = Equity + Liabilities

+ - - + -
1 Furniture R 295.00
Purchases R 1,055.00
Creditor

5 Creditor (Tel) R 346.50

Creditor (W+E) R 450.00
Electricity R 15.00
Bank R 811.50
Telephone R 3.50
Creditor (Tel) R 3.50

15 Discount teceived R 150

Creditors R 1,350
Bank R 1,200

20 Bank R 2,375
Debtors R 2,500
Discount granted R 125

30 Electricity R 450
Telephone R 350
Creditors

2,375.00 4,806.50 = 1,995.00 153.50 + 2,150.00

-2,431.50 -1,841.50
Liabilities
+

R 1,350.00

R 800

2,150.00
-
Chapter 2 Accounting equation

Question 2.7 Suggested solution

Date Details Dr Cr
1 Bank 100,000
Capital 100,000

2 Machinery 20,000
Furniture 15,000
Computer 5,000
Creditors 40,000

3 Stationery 186
Bank 186

3 Petty cash 1,200

Services rendered 1,200

5 Debtors 1,800
Services rendered 1,800

5 Drawings 20
Petty cash 20

5 Bank 1,180
Petty cash 1,180

8 Telephone 224
Bank 224

9 Petty cash 150

Capital 150

9 Donations 50
Petty cash 50

10 Postage 14
Petty cash 14

12 Bank 36
Petty cash 36

16 Petty cash 480

Services rendered (income) 480

18 Salaries (debtor) 150

Petty cash 150

19 Bank 330
Petty cash 330

22 Debtors 1,800
Services rendered (income) 1,800
 26 No cash available

29 Telephone 150
Municipal charges 350
Bank 500

29 Salaries 1,700
Bank 1,550
Debtors 150

30 Petty cash 1,800

Debtors 1,800

30 Credit losses 1,800

Debtors (M Bouta) 1,800

31 Creditors 40,000
Machinery 20,000
Furniture 15,000
Computer 5,000

In normal situations asset and expense accounts are debited and income and liability
accounts are credited.
Chapter 2 Accounting equation

Question 2.8 Suggested solution

1 a Purchase an asset for cash, purchase an asset on credit, received cash for
services rendered.
b Purchase an asset on credit, rent an office on credit, bank overdraft.
c Render services for cash, render services on credit, sale of inventory.
d Office rent, purchase stationery. Write off depreciation.

2 Yes, income and expenditures.

3 Rendering of services
Rent paid.
Chapter 2 Accounting equation

Question 2.9 Suggested solution

No. Source doc. Dr Cr A E

1 Cheque counter foil Loan Bank -500.00
Interest paid Bank -250.00 -250.00
2 Cr notes/Journal Creditors Stationery 0.00 500.00
3 Bankstatement/ Journal Bank charges Bank -20.00 -20.00
Drawings Bank -100.00 -100.00
Bank Interest received 50.00 50.00
4 Cheque counter foil Inventory Bank 2,200.00
-2,200.00
5 Invoice (d) Debtors Sales 1,320.00 1,320.00
Cost of sales Inventory -990.00 -990.00
-490.00 510.00
 L
-500.00

-500.00

0.00

-1,000.00
Chapter 2 Accounting equation

Queston 2.10 Suggested solution

No. Source doc. E A L

1 Invoice 0 24,000 24,000
2 Journal voucher 120 120 0
3 Receipt 37 37 0
4 Cash slip 600 600 0
Journal -400 -400 0
5 Invoice -700 -8,600 0
Journal voucher 2,400
5,500
6 Bank statement -245 -245 0
7 Bank statement 7 7 0
65
-65
8 Cheque counterfoil 0 -250 -250
9 Receipt (d) / Journal voucher -16 -80 0
64
10 Invoice / cheque counterfoil 0 2,750 2,300
-450
-597 25,903 26,050
Chapter 2 Accounting equation

Question 2.11 Suggested solution

No. Acc Dr Acc Cr E A L

1 Asset realisation 0 85 0
Equipment -85
Accumulated depreciation -40
Asset realisation 40
M Ellis 35
Asset realisation -35
Loss on sale of assets -10 0
Asset realisation -10
2 Bank Interest received 375 375 0
Bank 5000
Investment -5000
3 Freight on sales Petty cash -36 -36 0
4 Maintenance Creditors control -75 0 75
5 Cost of sales Inventory -525 -525
Bank Sales 700 700 0
6 Drawings Inventory -500 -500 0
7 Bank Debtors control 25
Credit losses -100 -125 0
8 Debtors control Interest Received 4 4 0
9 Creditors control Inventory 0 -270 -270
10 Loan Bank -680 -550
Interest on loan -130
-297 -1,042 -745
Chapter 2 Accounting equation

Question 2.12 Suggested solution

No. Acc Dr Acc Cr E A L

1 Bank Capital 5000 5000 0
2 Rent paid Bank -360 -510
Accrued expenses -60
Expenses paid in advance 90
3 Maintenance Creditors -105 105
4 Bank Debtors 62 0
Credit lossess -248 -310
5 Drawings Inventory -520 -520 0
6 Deposit Bank 90
Rates and taxes -70
Loan -400 -240
7 Bills payable Discount received 20 -480 -500
Bank
8 Debtors Bank -265 0
Discount allowed 9 274
9 Bank Debtors -108 0
Discount allowed -8 100
10 Inventory Creditors 405 405
Bank Sales 665 665
Cost of sales Inventory -405 -405
11 Acc depreciation Vehicles -850 -850
Debtors 215 215
575 575

3918 3628 -290

Chapter 2 Accounting equation

Question 2.13 Suggested solution

Date Equity Assets Liabilities

R R R
6-Jan +200 000 +200 000
6-Mar +250 000 +250 000
6-Apr +320 000 +320 000
-60 000 -60 000...
6-Jun +-25 000
-1 000 -1 000
6-Sep -5 000 -5 000
-2 000 +2 000
15-Jun +10 200 +10 200
19-Jun -500 -500
23-Jun +9 000 +9 000
28-Jun -8 000 -8 000
-4 000 -4 000
30-Jun +20 200 +20 200
-5 000 -5 000
-3 500 -3 500
+205 400 +722 400 +517 000
Chapter 2 Accounting equation

Question 2.14 Suggested solution

No. Account Debited Account Credited E A L

1 Asset realisation Vehicles -7600 -7600 0
Accumulated depr Vehicles Asset realisation 5200 5200
Bank Asset realisation 1900 1900
Loss on sale of assets Asset realisation -500 -500
2 Loan Bank -650 -600
Interest paid -50
3 Debtors control Creditors control 0 +500 +500
4 Discount allowed Debtors control -5 -155 0
Bank +150
5 Deposit Bank 0 +/- 170 0
6 Debtors control Bank 0 +/- 75 0
7 Purchases Creditors control/bank 0 3870 3870
8 Discount allowed Debtors control -5 -95 0
Bank +90
9 Creditors control/bank Purchases 0 -387 -387
10 Interest paid Creditors control -7 0 +7
11 Maintenance Bank -115 -115 0
12 Bank Rent received +700 0 -700
Chapter 2 Accounting equation

Question 2.15 Suggested solution

No. E A L
1 -70
-70
-90 -90 -
2 7,000 7,000 -
3 6 6 -
4 850 850 -
-130 -130 -
5 165
-165 -
-8 -8
6 -25,000 -25,000
17,000 17,000
7,000 7,000
-1,000 -1,000
7 -60
-40 -600 -500
5528 4888 -500

Note:
Assume the asset realisation account is an expense account under Equity.
Chapter 2 Accounting equation

Question 2.16 Suggested solution

No. E A L
1 - 700.00 700.00
2 5.00 -65.00 -
70.00
3 -215.00
-5.00 210.00 -
4 -231.25 -231.25 -
5 -360.00
50.40 410.40
6 +-195
7 225.00 225.00 -
-168.75 -168.75
8 -174.00 -174.00 -
9 -90.00 -
-7.00 83.00
10 -300.00 -300.00 -
11 10.00 -260.00
250.00
Chapter 2 Accounting equation

Question 2.17 Suggested solution

No. E A L
1 5,000 5,000 -
2 - 1,500 1,500
3 - -3,000 -3,000
4 - +/-20000 -
5 - - +/-1000
6 800 800 -
7 300 300 -
8 -400 -400 -
9 -120 - 120
10 -700 -700 -
11 600 600 -
Chapter 2 Accounting equation

Question 2.18 Suggested solution

E=A-L

Beginning of year: 1500 000 - 785 000 = 715,000

End of year: 1650 000 - 830 000 = 820,000

EQUITY (CAPITAL)
Drawings 24,000 Balance (begin) 715,000
Capital contributed 100,000
Profit (balancing) 29,000

Balance (end) 820,000

844,000 844,000

MAX
Chapter 2 Accounting equation

Question 2.19 Suggested solution

No Account description Equity Assets Liabilities

Dr Cr Dr Cr Dr
1 Bank 100,000
Capital 100,000

2 Equipment 30,000
Creditors

3 Inventory / trading stock 45,750

Bank 45,750

4 Debtors 22,500
Sales (revenue) 22,500
Cost of sales 15,000
Inventory / trading stock 15,000

5 Drawings 8,000
Inventory / trading stock 8,000

6 Bank 24,000
Sales (revenue) 24,000
Cost of sales 16,000
Inventory / trading stock 16,000

7 Credit losses / bad debts 3,600

Debtors 3,600

8 Lease / rental expense 2,200

Bank 2,200

9 Asset realisation / disposal 11,500

Accum depreciation 500
Equipment 12,000

Bank 10,000
Asset realisation / disposal 10,000

Loss on sale of asset 1,500

Asset realisation / disposal 1,500

57,800 146,500 232,750 114,050 -

CP 100
P 50
SP 150

Asset realisation
Equipm 12,000 Acc depr 500
Bank 10,000
Loss 1,500

12,000 12,000
Liabilities
Cr

30,000

30,000