The accounting equation: practice questions

How to approach these questions

Start by reading the question slowly and deciding which of the three quantities you must find. The equation says assets equal capital plus liabilities, and almost every task rearranges it. If capital is unknown, use assets minus liabilities.

If a missing asset or liability is wanted, isolate that term. Underline what the question asks for before you write anything. Many marks are lost by solving for the wrong unknown, or by giving a total when a single item was asked for.

Work in a fixed order so your method is visible. List every item given and label each as an asset, a liability or capital. A quick two-column jotting helps.

Put assets on the left and liabilities on the right. A bank overdraft is a liability, though students often file it as an asset. Drawings and loans also cause errors.

Then add each column and apply the equation. Show the addition and the rearrangement. They earn method marks even if one figure is mistyped.

For example, a business has premises of RM60,000, inventory of RM8,000, trade receivables of RM4,000 and cash of RM2,000. Total assets are RM74,000. Its liabilities are a bank loan of RM20,000 and trade payables of RM6,000, which total RM26,000.

Capital is 74,000 − 26,000 = RM48,000. Write out both totals, then the subtraction. If the examiner gave capital and asked for a missing asset, rearrange to assets = capital + liabilities and work back to the gap.

The second common style asks how a transaction changes the equation. Every transaction has at least two effects, and the equation must still balance afterwards. Buying inventory for cash raises inventory and lowers cash, so total assets and capital are unchanged.

Taking a loan raises cash and liabilities together. Paying a payable lowers cash and liabilities together. The owner adding capital raises cash and capital.

Write both effects side by side. If the two sides do not agree, you have missed one half.

Watch these traps. Drawings reduce capital, not liabilities. Profit increases capital and a loss reduces it, so fold profit for the year into capital before you compare periods.

Only the business's resources belong in the equation, not the owner's personal assets. When two dates are given and you must find profit, find opening and closing capital from the equation at each date.

Then use profit = closing capital − opening capital + drawings − capital introduced. Set this out as a small working.

Finish with a ten-second check. Put your answer back into assets = capital + liabilities and confirm both sides give the same total. Here, 74,000 = 48,000 + 26,000.

Label your final answer clearly.

Learn the vocabulary. An asset is something the business owns or is owed.

A liability is something the business owes. Capital is what the owner has invested plus retained profit, less drawings.

If you often lose marks on classifying items or on transaction effects, we can help. One of our teachers can go through them with you in a trial class, using questions like these. Book a trial class