THE ACCOUNTING EQUATION 2

Answers to Interactive questions

Answer to Interactive question 1

Assets = capital + liabilities. Therefore capital = assets liabilities

Answer to Interactive question 2

(a) Increase in liabilities (payables) CU800
Increase in assets (inventory) CU800
(b) Decrease in assets (cash) CU25
Decrease in capital (an expense reduces profit) CU25
(c) Decrease in assets (inventory) CU450
Increase in assets (cash) CU650
Increase in capital (profit) CU200
(d) Decrease in liabilities (payables) CU800
Decrease in assets (cash) CU800

Answer to Interactive question 3

The point in this case is that the car has a residual value of CU3,400. It would be inappropriate to account
for depreciation in such a way as to write off the asset completely over three years; the aim should be to
account only for its loss of value (CU10,000 CU3,400 = CU6,600), which suggests depreciation of
CU2,200 per year.

Answer to Interactive question 4

Asset Business Current or non-current

Van Delivery firm Non-current

Machine Manufacturing company Non-current
Car Car trader Current
Investment Any Either*

* The classification of the investment will depend on the purpose for which it is held. If the intention is to
make a non-current investment it will be a non-current asset, but if it is a short-term way of investing
spare cash it will be a current asset.

The Institute of Chartered Accountants in England and Wales, March 2009 51