Level: Easy
Easy Worked Examples: Classification of Accounts and the Accounting Equation
Six easy examples for Form 4 Chapter 2: account classification, current and non-current assets and liabilities, the accounting equation, transaction effects, drawings, contra entries and the chart of accounts.
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Example 1: Example 1: Classifying Accounts
Question
Solution plan
Recall the basic definitions: an Asset is property or a resource owned by the business; a Liability is what the business owes to outsiders; Owner's Equity is the owner's contribution (Capital); Revenue is income earned from operations; an Expense is a cost incurred to run operations. Match each item to the correct definition.
| Item | Amount (RM) | Classification |
|---|---|---|
| Cash | 5,000 | Asset |
| Furniture | 8,000 | Asset |
| Bank Loan | 10,000 | Liability |
| Capital | 20,000 | Owner's Equity |
| Rent Expense | 1,200 | Expense |
| Sales Revenue | 3,000 | Revenue |
Answer
Assets: Cash RM5,000 and Furniture RM8,000. Liability: Bank Loan RM10,000. Owner's Equity: Capital RM20,000. Revenue: Sales Revenue RM3,000. Expense: Rent Expense RM1,200.
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Example 2: Example 2: Current or Non-Current Assets and Liabilities
Question
Solution plan
Non-Current Assets are held for more than one year for operational use (e.g. Building, Machine). Current Assets are easily converted to cash within a year (e.g. Inventory, Debtor, Cash). Current Liabilities must be settled within a year (e.g. Creditor). Non-Current Liabilities are settled over more than a year (e.g. a 5-year Bank Loan).
| Item | Amount (RM) | Category |
|---|---|---|
| Building | 60,000 | Non-Current Asset |
| Machine | 15,000 | Non-Current Asset |
| Spare Parts Inventory | 4,000 | Current Asset |
| Debtor | 2,000 | Current Asset |
| Cash | 1,500 | Current Asset |
| Creditor | 3,000 | Current Liability |
| Bank Loan (5 years) | 20,000 | Non-Current Liability |
Answer
Non-Current Assets: Building RM60,000 and Machine RM15,000. Current Assets: Spare Parts Inventory RM4,000, Debtor RM2,000 and Cash RM1,500. Current Liability: Creditor RM3,000. Non-Current Liability: Bank Loan RM20,000.
Where marks are usually lost
Example 3: Example 3: Basic Accounting Equation
Question
Solution plan
The Accounting Equation without revenue and expense: Assets = Liabilities + Owner's Equity. Rearrange to find Owner's Equity: Owner's Equity = Assets − Liabilities. Substitute the given values.
| Particulars | Amount (RM) |
|---|---|
| Assets | 30,000 |
| Less: Liabilities | 12,000 |
| Owner's Equity (Assets − Liabilities) | 18,000 |
Answer
Owner's Equity = RM30,000 − RM12,000 = RM18,000.
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Example 4: Example 4: Effect of Transactions on the Equation
Question
Solution plan
Use Assets = Liabilities + Owner's Equity. (a) Capital in: Assets (Cash) +20,000 and Equity (Capital) +20,000. (b) Swap one asset for another: Furniture +5,000, Cash −5,000, so total Assets are unchanged. (c) Loan: Assets (Cash) +8,000 and Liabilities +8,000. Total each column for the closing balance.
| Transaction | Assets (RM) | Liabilities (RM) | Equity (RM) |
|---|---|---|---|
| (a) Started business with cash | 20,000 | 0 | 20,000 |
| (b) Bought furniture for cash (Furniture +5,000, Cash −5,000) | 0 | 0 | 0 |
| (c) Bank loan in cash | 8,000 | 8,000 | 0 |
| Closing Balance | 28,000 | 8,000 | 20,000 |
Answer
Closing balance: Assets RM28,000 = Liabilities RM8,000 + Owner's Equity RM20,000. The equation balances because RM28,000 = RM8,000 + RM20,000.
Where marks are usually lost
Example 5: Example 5: Equation with Revenue, Expense and Drawings
Question
Solution plan
The formula with revenue and expense: Closing Owner's Equity = Opening Capital + Revenue − Expense − Drawings. Revenue increases equity, while Expense and Drawings reduce equity. Then use Assets = Liabilities + Equity to find total Assets.
| Particulars | Amount (RM) |
|---|---|
| Opening Capital | 25,000 |
| Add: Service Revenue | 6,000 |
| Less: Utility Expense | -2,000 |
| Less: Cash Drawings | -1,000 |
| Closing Owner's Equity | 28,000 |
| Add: Liabilities (Creditors) | 4,000 |
| Total Assets | 32,000 |
Answer
Closing Owner's Equity = RM25,000 + RM6,000 − RM2,000 − RM1,000 = RM28,000. Total Assets = Equity RM28,000 + Liabilities RM4,000 = RM32,000.
Where marks are usually lost
Example 6: Example 6: Contra Entry and Chart of Accounts
Question
Solution plan
A Contra Entry is an adjustment when the same person is both a debtor and a creditor of the business. The contra amount is the smaller value, RM500. Debit the Creditor account (Mr Kamal) RM500 to reduce what we owe, and Credit the Debtor account (Mr Kamal) RM500 to reduce what he owes us. In the Chart of Accounts, these two accounts have separate codes so transactions post to the correct account.
| Date | Particulars | Debit (RM) | Credit (RM) |
|---|---|---|---|
| 2026 Mar 31 | Creditor Account (Mr Kamal) | 500 | |
| Debtor Account (Mr Kamal) | 500 | ||
| (Contra entry to reduce Mr Kamal's balances) | |||
| Total | 500 | 500 |
In accounting software, account codes from the Chart of Accounts identify the Debtor and Creditor accounts separately.
Answer
A contra entry of RM500 is made: Debit Creditor Account (Mr Kamal) RM500 and Credit Debtor Account (Mr Kamal) RM500. After the contra, Mr Kamal's Debtor balance falls from RM800 to RM300, and his Creditor balance becomes zero.
Where marks are usually lost
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