Level: HOTS (KBAT)
HOTS (KBAT) Worked Examples: Classification of Accounts and the Accounting Equation
Six HOTS examples of increasing difficulty for Form 4 Chapter 2 that require candidates to analyse, classify, compute and evaluate, not merely record. Each has a full solution, final answer and mark-loss notes.
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Example 1: Classification with justification: when the same asset changes class
Question
Solution plan
Apply the criteria: Current Assets are readily convertible to cash within one accounting period; Non-Current Assets are held long-term to generate income. Cars for sale = trading goods (inventory) = Current Asset. Furniture & computer are used to operate = Non-Current Assets. Bank = Current Asset. Creditors due shortly = Current Liability. The 5-year loan = Non-Current Liability. Then apply Equity = Assets − Liabilities.
| Item | Amount (RM) | Classification |
|---|---|---|
| Used cars held for sale | 180,000 | Current Asset (Inventory) |
| Office furniture | 12,000 | Non-Current Asset |
| Office computer | 4,000 | Non-Current Asset |
| Bank balance | 25,000 | Current Asset |
| Creditors | 30,000 | Current Liability |
| Bank loan (5 years) | 50,000 | Non-Current Liability |
| Item | RM |
|---|---|
| Total Assets (180,000 + 12,000 + 4,000 + 25,000) | 221,000 |
| (−) Total Liabilities (30,000 + 50,000) | 80,000 |
| Owner's Equity | 141,000 |
Answer
Non-Current Assets RM16,000 (furniture + computer); Current Assets RM205,000 (cars + bank); Current Liability RM30,000; Non-Current Liability RM50,000. Owner's Equity = RM221,000 − RM80,000 = RM141,000. (c) For the used-car centre, cars are trading goods bought for resale in the ordinary course of business, hence a Current Asset. For the workshop, the car (vehicle) is used for long-term operations and not for sale, hence a Non-Current Asset. Classification depends on the PURPOSE for which the asset is held in that business.
Where marks are usually lost
Example 2: Effect of transactions on the Accounting Equation (with revenue & expenses)
Question
Solution plan
Revenue increases equity; expenses and drawings reduce equity. Transaction 2 merely changes the form of assets (machine up, bank down), so total assets are unchanged. Transaction 7 increases assets and liabilities simultaneously. Sum the columns to verify A = L + E.
| Transaction | Assets (RM) | Liabilities (RM) | Equity (RM) |
|---|---|---|---|
| 1. Capital: bank 15,000 + machine 10,000 | 25,000 | 0 | 25,000 |
| 2. Bought washing machine by cheque | 0 | 0 | 0 |
| 3. Received laundry income in cash (revenue) | 3,000 | 0 | 3,000 |
| 4. Paid wages in cash (expense) | -800 | 0 | -800 |
| 5. Paid rent by cheque (expense) | -1,200 | 0 | -1,200 |
| 6. Cash drawings by owner | -500 | 0 | -500 |
| 7. Bought supplies on credit | 700 | 700 | 0 |
| Balance (A = L + E) | 26,200 | 700 | 25,500 |
Answer
Total Assets RM26,200 = Total Liabilities RM700 + Owner's Equity RM25,500. The equation balances. Closing equity RM25,500 = capital RM25,000 + revenue RM3,000 − wages RM800 − rent RM1,200 − drawings RM500.
Where marks are usually lost
Example 3: Computing equity with drawings of goods and assets
Question
Solution plan
Opening equity = Assets − Liabilities = 85,000 − 32,000. Net profit increases assets (cash) and increases equity. Drawings of goods reduce inventory (asset) and equity. Drawings of the computer reduce a non-current asset and equity. Neither drawing is an expense; each directly reduces owner's equity.
| Item | Assets (RM) | Liabilities (RM) | Equity (RM) |
|---|---|---|---|
| Balance at 1 January 2025 | 85,000 | 32,000 | 53,000 |
| Add: Net profit | 12,000 | 0 | 12,000 |
| Less: Drawings of goods | -1,500 | 0 | -1,500 |
| Less: Drawings of computer | -2,000 | 0 | -2,000 |
| Balance at 31 December 2025 | 93,500 | 32,000 | 61,500 |
Answer
Owner's equity on 1 January 2025 = RM53,000. On 31 December 2025, owner's equity = RM53,000 + RM12,000 − RM1,500 − RM2,000 = RM61,500. Verified: Assets RM93,500 = Liabilities RM32,000 + Equity RM61,500.
Where marks are usually lost
Example 4: Contra entries and the effect of omitting them
Question
Solution plan
Debt contra: the amount set off is the smaller figure (RM800). Debit Creditor's Account (Zaki) to reduce the liability, credit Debtor's Account (Zaki) to reduce the asset. Cash-to-bank contra: debit Bank (bank asset up), credit Cash (cash asset down). Both are internal transfers between the firm's own accounts, so total debits = total credits.
| Date | Particulars | Debit (RM) | Credit (RM) |
|---|---|---|---|
| 31 May | Creditor's Account (Zaki) | 800 | |
| Debtor's Account (Zaki) | 800 | ||
| (Contra of Zaki's debts) | |||
| 31 May | Bank | 2,000 | |
| Cash | 2,000 | ||
| (Cash banked) | |||
| Total | 2,800 | 2,800 |
Answer
After the debt contra, the Debtor's Account (Zaki) has a nil balance and the Creditor's Account (Zaki) has a RM400 balance (RM1,200 − RM800). The cash contra raises the bank balance by RM2,000 and reduces cash by RM2,000. (b) If the debt contra is not made, debtors are overstated by RM800 and creditors by RM800; total Current Assets and Current Liabilities in the Statement of Financial Position are overstated, and the business risks paying the full RM1,200 while separately chasing RM800.
Where marks are usually lost
Example 5: Correcting misclassification and its impact
Question
Solution plan
A 3-year loan repayable beyond one year = Non-Current Liability. Floral stock is trading goods for sale = Current Asset. Commission received is income, and as it is not the florist's core activity (selling flowers) it is non-operating revenue. Drawings are not an expense but a deduction from owner's equity. Evaluate each error's effect on the statements.
| Item | Amount (RM) | Clerk's classification (wrong) | Correct classification |
|---|---|---|---|
| Bank loan (3 years) | 40,000 | Current Liability | Non-Current Liability |
| Trading inventory (flowers & pots) | 6,000 | Non-Current Asset | Current Asset (Inventory) |
| Commission received | 900 | Expense | Non-operating revenue |
| Owner's cash drawings | 1,000 | Operating expense | Deduction from Owner's Equity |
Answer
Corrections: Loan RM40,000 = Non-Current Liability; Stock RM6,000 = Current Asset; Commission RM900 = non-operating revenue (not an expense); Drawings RM1,000 = deduction from equity (not an expense). Effect if uncorrected: (i) Current Liabilities overstated by RM40,000 and Non-Current Liabilities understated by RM40,000, so liquidity is misjudged; (ii) Non-Current Assets overstated and Current Assets understated by RM6,000; (iii) net profit understated by RM1,800 (commission RM900 should be added, not deducted); (iv) net profit further understated by RM1,000 as drawings were wrongly treated as an expense; since the drawings are then not deducted from capital, total owner's equity is unchanged, but both net profit and drawings are misstated.
Where marks are usually lost
Example 6: Contra, classification and preparing the Statement of Financial Position
Question
Solution plan
Step 1: apply the RM1,000 contra, debtors 6,000 − 1,000 = 5,000; creditors 7,000 − 1,000 = 6,000. Step 2: classify assets into Non-Current (equipment, vehicle) and Current (inventory, debtors, bank, cash). Step 3: equity = opening capital + net profit − drawings. Step 4: liabilities into Non-Current (4-year loan) and Current (creditors). Total Assets must equal Total Equity + Liabilities.
| Item | RM | RM |
|---|---|---|
| Non-Current Assets | ||
| Kitchen equipment | 30,000 | |
| Vehicle | 35,000 | |
| Total Non-Current Assets | 65,000 | |
| Current Assets | ||
| Raw-material inventory | 4,000 | |
| Debtors (after contra) | 5,000 | |
| Bank | 15,000 | |
| Cash | 3,000 | |
| Total Current Assets | 27,000 | |
| Total Assets | 92,000 | |
| Owner's Equity | ||
| Opening capital | 65,000 | |
| Add: Net profit | 13,000 | |
| 78,000 | ||
| Less: Drawings | 4,000 | |
| Total Owner's Equity | 74,000 | |
| Non-Current Liabilities | ||
| Bank loan (4 years) | 12,000 | |
| Current Liabilities | ||
| Creditors (after contra) | 6,000 | |
| Total Equity and Liabilities | 92,000 |
Answer
After the RM1,000 contra, debtors become RM5,000 and creditors RM6,000. Total Assets = RM92,000 (Non-Current RM65,000 + Current RM27,000). Owner's Equity = RM65,000 + RM13,000 − RM4,000 = RM74,000. Total Equity and Liabilities = RM74,000 + RM12,000 + RM6,000 = RM92,000. The statement balances: RM92,000 = RM92,000.
Where marks are usually lost
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