Effects of Transactions on the Accounting Equation

John, the owner of John Trading, contributed personal funds of $4 000 into the business' bank account.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash at bank +$4 000

• Equity: Drawings

  -$4 000

• Equity: Capital

  +$4 000

• Assets: Cash at bank -$4 000

John Trading purchased goods on credit from Premier Ltd for $2 800.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Goods

  +$2 800

• Assets: Inventory

  +$2 800

• Assets: Trade receivable - Premier Ltd

  +$2 800

• Liabilities: Trade payable - Premier Ltd

  +$2 800

John Trading received $1 000 cash from its tenant for rental of a part of its shop space.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash in hand +$1 000

• Assets: Cash at bank +$1 000

• Equity: Rental income

  +$1 000

• Equity: Rental expense

  +$1 000

John Trading received $2 000 cheque as commission for helping ABC Trading sell its goods.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash in hand +$2 000

• Assets: Cash at bank +$2 000

• Equity: Commission income

  +$2 000

• Liabilities: Trade payable - ABC Trading +$2 000

John, the owner, used $200 cash from the shop to purchase a handbag for his wife.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash in hand -$200

• Assets: Cash at bank -$200

• Equity: Drawings

  -$200

• Equity: Drawings +$200

John Trading issued a cheque of $300 to pay for the shop's utilities.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash in hand -$300

• Assets: Cash at bank -$300

• Equity: Utilities

  -$300

• Equity: Utilities

  +$300

John Trading took a loan of $10 000 from XYZ Finance.

State the effect of the transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash in hand +$10 000

• Assets: Cash at bank +$10 000

• Liabilities: Loan from XYZ Finance

  +$10 000

• Liabilities: Trade payable - XYZ Finance

  +$10 000

Answer explanation

If you chose Liabilities: Trade payable - XYZ Finance, please note that this is wrong. Trade payable strictly refers to a supplier who has either sold to business goods or physical assets like office equipment on credit. As this is a loan, XYZ Finance cannot be termed a trade payable ie credit supplier.

John Trading repaid credit supplier, Premier Trading, amount owing of $2 800 by cheque. State the effect of this transaction on the accounting equation. (Tip: Must select 2 accounts)

• Assets: Cash at bank -$2 800

• Assets: Trade receivable - Premier Trading

  -$2 800

• Liabilities: Trade payable

  -$2 800

• Liabilities: Trade payable - Premier Trading

  -$2 800

John Trading sold goods for $1 200 cheque. The goods cost $900. State the effect of this transaction on the accounting equation.

(Tip: Must select 4 accounts)

• Assets: Cash at bank +$1 200

• Assets: Cash in hand

  +$1 200

• Equity: Sales revenue

  +$1 200

• Assets: Inventory

  -$900

• Equity: Cost of sales

  -$900

John Trading sold goods for $2 000 on credit to Perfect Trading. The goods cost $1 800. State the effect of this transaction on the accounting equation.

(Tip: Must select 4 accounts)

• Assets: Cash at bank +$2 000

• Assets: Trade receivable - Perfect Trading

  +$2 000

• Equity: Sales revenue

  +$2 000

• Assets: Inventory

  -$1 800

• Equity: Cost of sales

  -$1 800