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Chapter 2

Q. 2.1

Look at the following transactions of Andrew Rose. How will they affect the double-entry
equation? Enter the changes to each component of the equation (as pluses and minuses)
in the table below, and then show the overall effect on the double-entry equation. The
changes relating to the first two transactions have been entered as an example.

1 1 January Starts a business by opening a bank account with £4,000

2 2 January Buys goods for resale with a bank transfer of £2,000

3 3 January Sells goods for cash, £700

4 4 January Pays wages £300 by cash

5 5 January Buys stationery from Paper Products valued at £700. Andrew
expects to pay for the stationery in a month’s time

6 6 January Buys a computer with a bank transfer, £1,000

7 7 January Sells goods to Sarah Prince for £820. Sarah hopes to pay in two
months’ time

8 8 January Andrew pays a lottery win of £1,000 into the business bank
account

9 9 January Andrew draws out £100 from the business bank account for his
own use
10 10 January Andrew buys goods for resale costing £1,500 from BiggaBuys,
and intends to pay for them in a month’s time

Assets
£
Expenses
£
Liabilities
£
Equity
£
Income
£
1  +4,000
(Bank)
 +4,000
2  -2,000
(Bank)
 + 2,000
(Purchases)
3
4
5
6
7
8
9
10

Step-by-Step

Verified Solution

Assets
£
Expenses
£
Liabilities
£
Equity
£
Income
£
1  +4,000
(Bank)
 +4,000
2  -2,000
(Bank)
   +2,000
(Purchases)
3  + 700 (Cash)   + 700 (Sales)
4  – 300 (Cash)   + 300 (Wages)
5   + 700
(Stationery)
  + 700 (Trade
payables)
6  + 1,000
(Computer)
– 1,000 (Bank)
7  + 820 (Trade
receivables)
  + 820 (Sales)
8  + 1,000 (Bank)   + 1,000 (Equity
increase)
9  – 100 (Bank) – 100 (Equity
decrease)
10   + 1,500
(Purchases)
+ 1,500 (Trade
payables)

The overall effect of the ten transactions is:

Assets   Expenses
£               £
Liabilities   Equity  Income
£                 £          £
+ 4,120\underbrace{}_{= + 8,620} + 4,500 + 2,200   \underbrace{+ 4,900}_{= + 8,620}   + 1,520