Level: Intermediate
Intermediate Worked Examples: Classification of Accounts and the Accounting Equation
Six graded examples covering account classification, current vs non-current assets and liabilities, the accounting equation with and without revenue and expenses, the effect of drawings, contra entries and the chart of accounts.
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Example 1: Classifying Account Items
Question
Solution plan
Recall each component: an Asset is a resource owned by the business; a Liability is what the business owes; Owner's Equity is the owner's claim (Capital); Revenue increases equity; Expense decreases equity. Non-current assets/liabilities are expected to last more than one year (Building, 5-year Loan), while current ones turn over within a year (Cash, Inventory, Payables).
| Item | Classification | RM |
|---|---|---|
| Building | Non-current Asset | 120,000 |
| Cash | Current Asset | 5,000 |
| Inventory | Current Asset | 12,000 |
| Bank Loan (5 years) | Non-current Liability | 40,000 |
| Trade Payables | Current Liability | 8,000 |
| Capital | Owner's Equity | 90,000 |
| Sales | Revenue | 60,000 |
| Salaries Expense | Expense | 18,000 |
Sales and Salaries Expense appear in the Income Statement; the remaining items appear in the Statement of Financial Position.
Answer
Non-current Asset: Building (RM120,000). Current Assets: Cash (RM5,000) and Inventory (RM12,000). Non-current Liability: Bank Loan (RM40,000). Current Liability: Trade Payables (RM8,000). Owner's Equity: Capital (RM90,000). Revenue: Sales (RM60,000). Expense: Salaries Expense (RM18,000).
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Example 2: Current vs Non-current Assets and Liabilities
Question
Solution plan
Non-current assets last more than a year and help generate income (Machinery, Vehicle). Current assets are cash or turn over within a year (Inventory, Receivables, Bank, Cash). Non-current liabilities are settled beyond a year (5-year Loan). Current liabilities are due within a year (Payables, Overdraft). Total each group.
| Particulars | RM |
|---|---|
| Non-current Assets | |
| Machinery and Workshop Equipment | 55,000 |
| Motor Vehicle | 48,000 |
| Total Non-current Assets | 103,000 |
| Current Assets | |
| Spare-parts Inventory | 9,000 |
| Trade Receivables | 4,500 |
| Bank Balance | 7,000 |
| Cash | 800 |
| Total Current Assets | 21,300 |
| Total Assets | 124,300 |
| Particulars | RM |
|---|---|
| Non-current Liabilities | |
| Bank Loan (5 years) | 30,000 |
| Total Non-current Liabilities | 30,000 |
| Current Liabilities | |
| Trade Payables | 6,300 |
| Bank Overdraft | 2,200 |
| Total Current Liabilities | 8,500 |
| Total Liabilities | 38,500 |
Answer
Total Non-current Assets RM103,000; Total Current Assets RM21,300; Total Assets RM124,300. Total Non-current Liabilities RM30,000; Total Current Liabilities RM8,500; Total Liabilities RM38,500.
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Example 3: Transaction Effects: Equation Without Revenue and Expenses
Question
Solution plan
Every transaction must keep the equation balanced. (1) Cash up, Capital up. (2) Furniture up, Cash down, total assets unchanged. (3) Inventory (asset) up, Payables (liability) up. (4) Bank (asset) up, Loan (liability) up. (5) Bank down, Payables down. Track the running balance of each account after each transaction.
| Transaction | Cash | Bank | Furniture | Inventory | Payables | Loan | Capital |
|---|---|---|---|---|---|---|---|
| (1) Cash capital | 50,000 | 0 | 0 | 0 | 0 | 0 | 50,000 |
| (2) Furniture for cash | 42,000 | 0 | 8,000 | 0 | 0 | 0 | 50,000 |
| (3) Inventory on credit | 42,000 | 0 | 8,000 | 6,000 | 6,000 | 0 | 50,000 |
| (4) Bank loan | 42,000 | 20,000 | 8,000 | 6,000 | 6,000 | 20,000 | 50,000 |
| (5) Pay payables | 42,000 | 14,000 | 8,000 | 6,000 | 0 | 20,000 | 50,000 |
Note transaction (2): total assets stay at RM50,000 because it is an exchange between assets (cash to furniture).
| Particulars | RM |
|---|---|
| Total Assets (Cash + Bank + Furniture + Inventory) | 70,000 |
| Total Liabilities (Loan) | 20,000 |
| Owner's Equity (Capital) | 50,000 |
| Liabilities + Owner's Equity | 70,000 |
Answer
Closing balances: Cash RM42,000, Bank RM14,000, Furniture RM8,000, Inventory RM6,000 (Total Assets RM70,000); Payables RM0, Loan RM20,000 (Total Liabilities RM20,000); Capital RM50,000. Equation balances: RM70,000 = RM20,000 + RM50,000.
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Example 4: Accounting Equation With Revenue and Expenses
Question
Solution plan
Step 1: Opening equity = Opening assets - Opening liabilities = 80,000 - 25,000. Step 2: Net profit = Total revenue - Total expenses. Step 3: Closing equity = Opening equity + Additional capital + Net profit - Drawings. Step 4: Closing assets = Closing equity + Closing liabilities. Revenue increases equity; expenses and drawings decrease it.
| Particulars | RM |
|---|---|
| Revenue | |
| Sales | 70,000 |
| Commission Revenue | 3,000 |
| Total Revenue | 73,000 |
| Less: Expenses | |
| Rent Expense | 12,000 |
| Salaries Expense | 20,000 |
| Utilities Expense | 4,000 |
| Total Expenses | 36,000 |
| Net Profit | 37,000 |
| Particulars | RM |
|---|---|
| Opening Assets | 80,000 |
| Less: Opening Liabilities | 25,000 |
| Opening Equity | 55,000 |
| Add: Additional Capital | 10,000 |
| Add: Net Profit | 37,000 |
| Less: Drawings | 5,000 |
| Closing Owner's Equity | 97,000 |
| Add: Closing Liabilities | 30,000 |
| Closing Assets | 127,000 |
Answer
Net profit is RM37,000. Closing Owner's Equity is RM97,000 (55,000 + 10,000 + 37,000 - 5,000). Closing Assets are RM127,000 (97,000 + 30,000).
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Example 5: Effect of Drawings of Goods and Assets
Question
Solution plan
Drawings by the owner, whether goods, cash or an asset, reduce Assets and reduce Owner's Equity by the same amount. Liabilities are unaffected. (1) Inventory down RM1,500, Equity down RM1,500. (2) Cash down RM800, Equity down RM800. (3) Equipment down RM2,000, Equity down RM2,000. Compute the closing balance of each component.
| Transaction | Assets | Liabilities | Owner's Equity |
|---|---|---|---|
| Opening Balance | 40,000 | 8,000 | 32,000 |
| (1) Drawings of inventory | -1,500 | 0 | -1,500 |
| (2) Drawings of cash | -800 | 0 | -800 |
| (3) Drawings of equipment | -2,000 | 0 | -2,000 |
| Closing Balance | 35,700 | 8,000 | 27,700 |
Closing asset detail: Cash RM4,200, Inventory RM13,500, Equipment RM18,000, total RM35,700.
Answer
After all three drawings: Total Assets RM35,700, Liabilities remain RM8,000, Owner's Equity RM27,700. The equation stays balanced: RM35,700 = RM8,000 + RM27,700. Total drawings of RM4,300 reduce owner's equity.
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Example 6: Contra Entry and Chart of Accounts
Question
Solution plan
A contra entry offsets the receivable account against the payable account of the same person. The contra amount is the smaller value, RM1,200. Debit Payable (Ali) to reduce the liability and Credit Receivable (Ali) to reduce the asset. After contra: Receivable Ali = RM1,200 - RM1,200 = RM0; Payable Ali = RM1,800 - RM1,200 = RM600. A Chart of Accounts organises accounts by code and class for use in accounting software.
| Date | Particulars | Debit (RM) | Credit (RM) |
|---|---|---|---|
| 30 April | Payable (Ali) | 1,200 | |
| Receivable (Ali) | 1,200 | ||
| (Contra entry for the mutual offset amount) | |||
| Total | 1,200 | 1,200 |
| Code | Account Name | Account Class |
|---|---|---|
| 1,000 | Cash | Asset |
| 1,100 | Bank | Asset |
| 1,200 | Trade Receivables | Asset |
| 2,000 | Trade Payables | Liability |
| 3,000 | Capital | Owner's Equity |
| 4,000 | Sales | Revenue |
| 5,000 | Salaries Expense | Expense |
Account codes and classes let accounting software sort transactions automatically into the financial statements.
Answer
(a) Debit Payable (Ali) RM1,200; Credit Receivable (Ali) RM1,200. (b) After the contra, the Receivable Ali balance is RM0 and the Payable Ali balance is RM600 (credit). (c) The Chart of Accounts lists each account with its code and class (Asset, Liability, Owner's Equity, Revenue, Expense).
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