Week 2 Answer Key

Accounting Equation & Double-Entry System (Return to Syllabus)

Detailed Instructor Answer Key — Assets, Liabilities, Equity, Debits & Credits, Chart of Accounts, Journal Entries.

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Concept 1

The Accounting Equation — Answer Key

The accounting equation is the foundation of the accounting system:

Assets = Liabilities + Equity

This equation must always remain in balance. Every transaction affects at least two accounts, ensuring financial accuracy and integrity.

Example Solutions

Purchased equipment with a loan ($5,000): Equipment ↑, Loan Payable ↑
Customer pays invoice: Cash ↑, Accounts Receivable ↓
Paid utilities: Cash ↓, Expense ↑ (reducing Equity)

Concept 2

Assets, Liabilities, and Equity — Answer Key

Assets

Resources owned by the business with future economic value. Examples: Cash, AR, Inventory, Equipment, Prepaid Expenses.

Liabilities

Obligations owed to others. Examples: AP, credit cards, loans, taxes payable.

Equity

Owner’s residual value. Includes owner’s capital, retained earnings, and draws. Equity ↑ with revenue, ↓ with expenses and draws.

Concept 3

Chart of Accounts — Answer Key

The Chart of Accounts (COA) categorizes every financial transaction. Typical numbering:

1000 — Assets
2000 — Liabilities
3000 — Equity
4000 — Revenue
5000–7000 — Expenses

A well-structured COA improves consistency, reporting, and error reduction.

Concept 4

Double-Entry Accounting — Answer Key

Every transaction has two sides: One debit and one credit (or multiple of each). Debits must always equal credits.

This system creates accuracy, prevents errors, and maintains the accounting equation.

Instructor Example

Customer pays $1,000 on account:

Debit: Cash 1,000
Credit: Accounts Receivable 1,000

Concept 5

Debit & Credit Rules — Answer Key

Account Type	Debit ↑	Credit ↑
Assets	Increase	Decrease
Liabilities	Decrease	Increase
Equity	Decrease	Increase
Revenue	Decrease	Increase
Expenses	Increase	Decrease

These rules dictate how every transaction must be recorded.

Concept 6

Transaction Impact on Accounting Equation — Answer Key

Example A — Owner invests $10,000 cash

Cash ↑
Owner’s Capital ↑

Example B — Buy $600 supplies on credit

Supplies ↑
Accounts Payable ↑

Example C — Pay $1,200 rent

Rent Expense ↑ (reduces Equity)
Cash ↓

Concept 7

Journal Entry Formatting — Answer Key

A correct journal entry includes: date, debit account(s), credit account(s), explanation.

Instructor Example

Rent Expense................. 1,200
    Cash........................................ 1,200
(Paid monthly rent)

Homework Solutions

Sample Homework Answers — Journal Entries

1. Owner invests $5,000

Cash.................................... 5,000
    Owner's Capital................ 5,000

2. Purchase supplies on credit ($300)

Office Supplies...................... 300
    Accounts Payable............. 300

3. Receive $1,000 from customer

Cash.................................... 1,000
    Accounts Receivable........ 1,000

4. Pay wages ($2,500)

Wages Expense..................... 2,500
    Cash........................................ 2,500

5. Earn revenue ($800 cash)

Cash.................................... 800
    Service Revenue.................. 800

Discussion

Discussion Prompt — Instructor Answer

The double-entry system is more reliable because it requires every transaction to be recorded in at least two accounts, providing a built-in accuracy check.

Single-entry provides no error detection and cannot produce complete financial statements. Double-entry ensures that the books remain balanced, accurate, and auditable.

Summary

Week 2 Summary — Answer Key

Students must demonstrate mastery of the accounting equation, debit/credit rules, COA structure, and correct journal entry formatting. This foundation supports all future bookkeeping, including adjusting entries, reconciliations, and financial statement preparation.

Next week: Using source documents and journalizing real business transactions.