REVIEW QUESTIONS

1. What is the basic accounting equation?

ASSET=LIABILITIES+EQUITY

2. What is the expanded accounting equation?

ASSETS = LIABILITIES + EQUITY + INCOME - EXPENSES

3. Define briefly the following: assets, liabilities, equity, income and expenses.

Assets – Property owned by a person or company, regarded as having value and

available to meet debts, commitments, or legacies.

Liabilities – Something a person or company owes, usually a sum of money and are
settled over time through the transfer of economic benefits.

Equity – A person or company’s ownership

Income – Money received, for work or through investments usually measured in money
that derives from capital or labor.

Expenses – The cost or money required/ spent for something.

4. What are the essential aspects in the definitions of asset and liability, respectively?

Assets are the items your company owns that can provide future economic benefit.
Liabilities are what you owe other parties. In short, assets put money in your pocket, and
liabilities take money out.
PROBLEMS

PROBLEM 1: TRUE OR FALSE

1. Legal ownership is a necessary criterion when determining the existence of an asset.

FALSE

2. You acquired a car through an auto loan. The bank holds the registration papers of
the car until you have fully paid the loan. Right now, the car is not yet your asset even
though you are already using it because you don't legally own the car yet. FALSE

3. An essential element of an asset is "control." Control means ownership. FALSE

4. Control of an asset refers to an entity's exclusive right to enjoy the economic benefits
from the economic resource, including the entity's ability to prevent others from enjoying
those benefits. TRUE

5. Legal obligations arise only from law. FALSE

6. Obtaining a loan increases both your assets and liabilities, but not your equity. TRUE

7. Equity is assets plus liabilities. FALSE

8. Assets can arise from future events. FALSE

9. Capital, net assets and net worth are other terms used to describe equity. TRUE

10. Assets plus equity equals liabilities. FALSE

PROBLEM 2: TRUE OR FALSE

1. You had a house constructed through a housing loan. You moved in to your new
home. However, the bank holds legal title over your property until you have fully paid the
loan. The house is already your asset even if you have not yet fully paid the loan because
you control the right over the economic benefits that the property may produce. TRUE

2. Control over a resource must have been obtained first before an asset is recorded. A
mere intention to obtain control over a resource at a future time does not warrant the
recognition of an asset. TRUE

3. You bought a pair of shoes. You realized that the shoes don't look good on you so you
decided not to use them anymore. However, you don't want to give the shoes away or
let others use it. The shoes are not your assets. FALSE

4. The shoes in #3 above still have future economic benefits even if you don't want to use
them anymore because you can still sell them or exchange them for other resources.
TRUE

5."Economic benefits" means the potential of a resource to provide an entity, directly or

indirectly, with cash. TRUE

6. Physical possession is a necessary condition in order for control to exist. FALSE

7. Expenses can result from an increase in assets. FALSE

8. 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, p6M were provided by your creditors
and not you. TRUE

9. Income increases equity. TRUE

10. Profit decreases equity. FALSE

PROBLEM 3: TRUE OR FALSE

1. Total assets are P10. Total liabilities are P6. Therefore, total equity is P16. FALSE

2. Total assets are P16. Total liabilities are P6. Therefore, total equity is P10. TRUE

3. Total assets are p8. Total equity is P6. Therefore, total liabilities are P2. TRUE

4. Total liabilities are P6. Total equity is p3. Therefore, total assets are p10. FALSE

5. Total income is p10. Total expenses are P4. Therefore, the difference of P6 is loss. FALSE

6. Total income is p10. Total expenses are P14. Therefore, the difference of P4 is loss. TRUE

7. Beginning equity is P14. Profit during the period is 96. Therefore, ending equity is p20.
TRUE

8. Beginning equity is P14. Loss during the period is 94. Therefore, ending equity is P18.
FALSE

9. Total assets are P20. Total liabilities are P10. Total equity, before income and expenses,
is P3. Therefore, profit is p7. TRUE

10. Total assets are P20. Total liabilities are 910. Total equity, before income and expenses,
is P3. Total income is 99.Therefore, total expenses are P2. FALSE
 ₱60,000
₱260,000

₱920,000
₱500,000
₱140,000

₱190,000
₱420,000
₱920,000
₱700,000

₱1,310,000

₱170,000

₱520,000

₱(20,000)

₱290,000

₱1,350,000

₱220,000

₱390,000

₱410,000

₱470,000

₱1,350,000
PROBLEM 8: COMPUTATIONS - ACCOUNTING EQUATION

Instruction; Determine the effects of the transactions or events described below on the
basic accounting equation.

Example: You invested p20 cash from your personal savings to your business.

ASSET = LIABILITIES + EQUITY

P20 0 P20

1. You found additional P10 in your shoe. You also invested this amount to your business.

ASSET = LIABILITIES + EQUITY

P30 0 P30

2. Your business obtained a loan of 200.

ASSET = LIABILITIES + EQUITY

P230 P200 P30

3. Your business earned income of P2,000 during the period. The income did not affect
your liabilities.

ASSET = LIABILITIES + EQUITY + INCOME

P2,230 P200 P2,030 P2,000

4. Your business incurred expenses of p800 during the period. The expenses did not affect
your liabilities.

ASSET = LIABILITIES + EQUITY + INCOME - EXPENSES

P2,230 P200 P2,030 P2,000 P800
 ASSET = LIABILITIES + EQUITY + PROFIT
P2,230 P200 P2,030 P1,200

ASSET = LIABILITIES + EQUITY

P3,430 P200 P3,230

5. Get the totals of the assets, liabilities and equity, INCLUDING the effects of the given
example. Check if the accounting equation is balanced.

ASSET = LIABILITIES + EQUITY

P3,430 P200 P3,230

*Hints:

If you don't know' the effects of these transactions, go back to the definitions of income
and expense. See what else do these items affect other than liabilities.

Show decreases in the elements of the accounting equation as negative

values, i.e., amounts in parentheses.

PROBLEM 9: MULTIPLE CHOICE

1. A liability cannot arise from

A. a legal obligation resulting from a requirement of the law.
B. a contract that an entity has entered into.
C. a legal obligation resulting from an operation of the law.
D. an intention to acquire assets in the future.

2. Which of the following is not an essential element of an asset?

A, Control over the resource
B. A past event resulting to control over the resource
C. Potential to produce economic benefits
d. Ownership over the resource

3. Which of the following is not an essential element of a liability?

a. Present obligation
b. A past event resulting to a present obligation
c. Potential to cause the transfer of an economic resource
d. Intention to obligate oneself in the future

4. You acquired a cellphone through a monthly installment plan. According to your

contract, you are required to return the cellphone to the supplier if you miss out on two
installment' payments. Upon signing the contract, the supplier gave you the cellphone.
You immediately took photographs of your face and uploaded them to the internet.
Which of the following statements is true?
a. The cellphone becomes your asset only after you have fully paid the installment price.
b. The cellphone is already your asset because you control the economic benefits from
it. Legal ownership is not a necessary criterion when determining the existence of an asset
- control is!
c. The cellphone is the supplier's asset until you have fully paid the installment price.
d. The cellphone looks nice but the selfie is not.

5. Upon taking possession of the cellphone in #4 above, you will record it as

a. an asset and a liability
b. an asset and equity.
C. an asset only.
d. To be recorded only upon full payment of the purchase price.

6. Several months before your birthday, you repeatedly posted on Facebook that you
will be throwing a party. You invited all your classmates, neighbors, strangers, friends and
"netizens" from all over the world to come. On your birthday, you will be obligated to
throw a party because of a
a. legal obligation.
c. Facebook post.
b. constructive obligation.
d. life event.
7. Income could not possibly result
a. from an increase in assets.
B. from a decrease in liabilities.
C. from an increase in liabilities.
d. in an increase in equity.

8. Which of the following statements is correct regarding income and expenses?

A. If income exceeds expenses, the excess represents loss.
b. If expenses exceed income, the excess represents profit
c. Income less expenses equals equity.
d. Income and expenses do not arise from transactions between a business and its owner.

9. In the expanded basic accounting equation, why are expenses deducted from
equity?
A. because expenses increase equity
B. because expenses decrease equity
C. because expenses do not affect equity
D. because Fra Luca Pacioli says so

10. A business owner's contribution to the business results in

a. an increase in assets and an increase in income.
b. a decrease in assets and an increase in owner's equity,
c. an increase in assets and an increase in liabilities.
d. an increase in assets and an increase in owner's equity.

PROBLEM 10: MULTIPLE CHOICE

1. ABC Co. has total liabilities of P20M and total equity of 30M. ABC Co. has total assets
of:
a. P10M
b.P40M
c.P50M
d. None of these
2. It is an economic resource controlled by the entity that has resulted from past events
and has a potential to produce economic benefits.
a. Asset
b. Liability
c. Equity
d. Income
3. A decrease in the economic benefits of a resource would be treated as:
a. asset.
b. liability.
c. expense.
d. income.
4. An event that resulted to the obtaining of control over an economic resource or the
incurrence of a present obligation is called a
a. past event.
b. current event.
c. future event.
d. special event.
5. It is a present obligation that has resulted from past events and has the potential to
cause a transfer of an economic resource in its settlement.
a. asset.
b. liability.
c. expense.
d. income.
6. Imagine you are an entrepreneur. Which of the following would you consider to be a
good news?
a. Your business earned zero income and incurred expenses of 40M.
b. Your business earned income of P30M and incurred expenses of 40M.
c. The liabilities of your business increased by p10M.
d. Your business earned income of P30M, and incurred expenses of P10M.
7. Control over an asset may arise from
a. the exclusive right to enjoy the economic benefits from the asset.
b. the ability to prevent others from enjoying the economic benefits from the asset.
c. the possession of the asset but not the right to direct how, when and for what purpose
the asset should be used.
d. a and b
8. Expenses could not possibly result from
a. decrease in assets.
B. from a decrease in liabilities.
c. from an increase in liabilities.
d. to a decrease in equity.
9. An entity's equity increased but there were no transactions involving the entity and its
owner during the period. Which of the following could be a valid reason for this?
a. The entity obtained a loan.
b. The entity earned profit.
c. The entity incurred loss.
d. Magic!
10. An entity's total assets and total equity decreased but total liabilities remained the
same. Also, there were no transactions involving the entity and its owner during the
period. Which of the following could be a valid reason for this?
a. The entity obtained a loan.
b. The entity earned profit.
c. The entity incurred loss.
d. Aliens!

PROBLEM 11: MULTIPLE CHOICE

1. A business has total liabilities of P220,000 and equity of P90,000. How much are the total
assets?
(220,000 + 90,000 = 310,000)
a. 300,000
b.310,000
c.130,000
d. None of these
2. A business has total assets of P380,000 and equity of P129,000. How much are the total
liabilities?
(P380,000 - P129,000 = 251,000)
a. 215,000
b. 509,000
c.251,000
d. None of these
3. A business has total assets of P780,000 and total liabilities of P220,000. How much is the
total equity?
(P780,000 - P220,000 = 560,000)
a. 650,000
b. 561,000
c.530,000
d. None of these
4. A business had total income of 570,000 an total expense of 320,000 how much is the
price of profit (or loss)
FORMULA = (570,000 - 320,000 = 250,000)

A. 250,000
b. (250,000)
C. 890,000
d. None of these
5. A business had total income of P62,000 and total expenses of P91,000. How much is the
profit (or loss)?
(62,000 – 91,000 = -29,000)
a. (29,000)
b.29,000
c.153,000
d. None of these
6. A business had total expenses of P29,000 and reported a profit of P30,000. How much
is the total income?
(30,000 - 29,000 = 1,000)
a. 1,000
b. 59,000
c.130,000
d. None of these
7. A business had total income of P53,000 and reported a profit of P38,000. How much
are the total expenses?
(53,000 + 38,000 = 91,000)
a. 91,000
b. 15,000
c.130,000
d. None of these
8. A business had ending total assets of P67,000, ending total liabilities of P15,000 and
beginning equity is P8,000. If the total expenses for the period amount to P29,000, how
much is the total income?
(67,000 = 15,000 + 8,000 + (73,000 – 29,000))
a. 37,000
b. 73,000
c.103,000
d. None of these
9. A business had ending total assets of P89,000, ending total liabilities of P36,000 and
beginning equity of P18,000. If total income for the period amounts to P57,000, how much
are the total expenses?
(89,000 = 36,000 + 18,000 + (57,000 – 22,000))
a.30,000
c.22,000
b. 31,000
d. None of these
10. A business had a beginning equity of P52,000. If the total income for the period is
P87,000 while the total expenses are P63,000, how much is the ending balance of equity?
(52,000 + (87,000 – 63,000)) = 76,000
a.67,000 c.76,000 b.71,000

PROBLEM 12: MULTIPLE CHOICE

1. A business 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?
(123,000 + (59,000 – 81,000)) = 101,000
a. 130,000
c.101,000
b. 110,000
d. None of these
2. A business had a beginning equity of P62,000 and ending equity of p87,000. If the total
income for the period is P98,000,how much is the total expenses?
(87,000 = 62,000 + (98,000 – 73,000))
a.67,000
c.76,000
b.73,000
d. None of these
3. A business had a beginning equity of P62,000 and ending equity of p87,000. If the total
expenses for the period 'are P73,000, how much is the total income?
(87,000 = 62,000 + (98,000 – 73,000))
a.67,000
b.73,000
c.76,000
d. None of these
4. In accounting, a negative amount is normally presented
a. beginning with a minus sign. c. as a squeezed amount.
b. in parentheses d. negatively.
5. Manong Magba Balut sells balut. At the beginning of the day, Manong Balut had
P1,000 cash. Manong used that amount to buy "balut" (uncooked), cook the "balut" and
sell the "balut "online. At the end of the day, Manong Balut had p1,700 cash. Assuming
all other expenses were accounted for and Manong Balut did not incur any liabilities
during the day, which of the following is most likely to be a valid statement?
a. Manong Balut earned profit of p1,700, representing the increase in Manong's assets
(i.e., cash) resulting to an increase in his equity.
b. Manong Balut earned profit of. P700, representing the increase in Manong's assets (i.e.,
cash) resulting to an increase in his equity.
c. Sorry I can't solve this because I don't know what a "balut" is.
d. I don't know. I think I'd better ask Manong Balut to teach me accounting.
Use the following information for the next eight questions:
Papa gives you a weekly allowance of P20. In the next questions, we will treat your weekly
allowance as your weekly income and the amount you spend out of the allowance as
your expenses. Any unspent amount (i.e., savings) represents your profit.
6. You spent P18. Which of the following statements is correct?
a. Your profit for the week is p20.
b. Your profit for the week is P2. You incurred a loss P18.
d. Papa is kuripot.

7. To earn a profit of P10 in a month, your weekly spending should be (use 4 weeks per
month)
a， 971.5

b.70.9
C. 17.5
d. That is impossible! I would starve myself first before I can earn that profit.

8. You spent all your allowance for the week, In addition, you purchased 1 "balut" worth
P16 from Manong Balut (see #5), on credit. You told Manong Balut you will pay him next
week. Under the accrual basis of accounting, your profit (loss) for the current week is
a. P16.
c. (P16)

9. If your total spending for the year was p936, your profit (loss) would be (use 52 weeks
per year)
a. P104
B. P0
C. P1,040
d. I don't know. Accounting is so complicated!
10. On Day 1 of' the first week of the year, your accounting equation will show which of
the following? (Note: The allowance is nonrefundable to Papa.