Solved practical exercises: 20 practical cases on the accounting equation
Solved Practical Exercises: 20 Cases on the Accounting Equation
If you are looking for practical exercises on the accounting equation (not just theory), you are in the right place. Here you will find 20 solved accounting problems step-by-step to learn how financial transactions affect Assets, Liabilities, and Equity. To set the foundation correctly before starting exercises: To set the foundation correctly: Accounting Equation.
- Read the quick solution rule (ΔAssets = ΔLiabilities + ΔEquity).
- Try to solve each case on your own first, then open the solution in the card.
- Repeat the exercises twice: once without journal entries, and once with journal entries.
1) 4-Step Solution Method
- Identify Transaction Type: Funding? Buy? Sell? Payment? Expense? Prepaid? Loan?
- Write Changes (Δ): What increased/decreased in Assets, Liabilities, and Equity?
- Check Balance: Does ΔAssets = ΔLiabilities + ΔEquity?
- Optional: Write the simplified Journal Entry to solidify understanding (Debit/Credit).
2) Quick Rules Before Exercises
- Owner Funding increases Assets and increases Equity.
- Loan increases Assets and increases Liabilities.
- Sale (Revenue) increases Assets (or Receivables) and increases Equity (because Revenue increases it).
- Expense decreases Assets (or increases accrued liabilities) and decreases Equity.
- Payment to Supplier decreases Assets and decreases Liabilities (it is not an expense at the moment of payment if the purchase was recognized earlier).
- Collection can be revenue, settlement of receivables, or advance payment—this is where most confusion happens.
3) Quick Balance Check Calculator
Use this as a “quick check” after any exercise: Enter the Change in Assets, Liabilities, and Equity (with + / – sign). If it shows as Balanced, your solution is logical.
4) 20 Solved Exercises (Open Solution)
These are short practical applications—each card contains the “Question” then the “Solution”. Focus on the Changes (Δ) before thinking about entries.
Exercise 1 Funding
The owner invested cash of 50,000 in the entity.
| Account | Debit | Credit |
|---|---|---|
| Cash/Bank | 50,000 | — |
| Capital | — | 50,000 |
Exercise 2 Asset Exchange
The entity purchased furniture for cash for 8,000.
| Account | Debit | Credit |
|---|---|---|
| Furniture/Fixed Assets | 8,000 | — |
| Cash/Bank | — | 8,000 |
Exercise 3 Credit Purchase
The entity purchased goods/inventory on account for 12,000.
Check Balance: ΔA (+12,000) = ΔL (+12,000) + ΔE (0)
Exercise 4 Supplier Payment
The entity paid suppliers 5,000 for previously recorded payables.
Note: This is not an “Expense” at the moment of payment; it is a Liability Reduction.
Exercise 5 Cash Sale
Services were sold for cash for 3,000 (Revenue).
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Exercise 6 Credit Sale
Service provided to a client on credit for 6,500 (to be paid later).
Exercise 7 Collection
Collected 2,000 from a client as part payment of previously recorded receivables.
Exercise Idea: Collection here is not new revenue because it settles a previous transaction.
Exercise 8 Expense
The entity paid monthly rent in cash for 1,200.
Exercise 9 Prepaid Expense
The entity paid one-year insurance in advance for 9,600.
Rule: Payment does not mean immediate expense if the benefit is future.
Exercise 10 Adjustment
At month-end, part of the prepaid insurance was expensed for one month: 800.
Exercise 11 Deferred Revenue
The entity received an advance payment from a client for service to be performed later for 4,000.
Exercise 12 Liabilities to Equity
50% of the service related to the previous advance was performed, recognizing revenue of 2,000.
Exercise 13 Loan
The entity obtained a bank loan in cash for 20,000.
Exercise 14 Principal Repayment
The entity repaid 3,000 of the loan (principal only).
Exercise 15 Interest
The entity paid loan interest in cash for 300.
Exercise 16 Salaries
Employee salaries paid in cash for 2,700.
Exercise 17 Supplies
The entity purchased office supplies for cash for 1,000 (to be used later).
Exercise 18 Supplies Consumption
Office supplies worth 250 were used during the month.
Exercise 19 Drawings
The owner withdrew cash of 1,500 from the entity for personal use.
Exercise 20 Depreciation (Non-cash)
Furniture depreciation recorded for 400 (non-cash entry).
Important: No cash payment here, but assets decrease “accounting-wise” via Accumulated Depreciation.
- If you solved 15/20 without opening the solution ⇒ Excellent.
- If you confused Collection with Revenue or Payment with Expense ⇒ Go back to “Accrual” rule then repeat exercises 11–12, 7, and 9–10.
- If you struggled with entry directions ⇒ Review the “Debit/Credit” logic in the main article.
5) Common Mistakes (Loss of Balance)
- Considering every cash inflow as revenue (especially collection from receivables, advance payments, or loans).
- Considering every cash outflow as an expense (payment to supplier/asset purchase/prepaid expense).
- Forgetting that Revenue and Expense affect Equity (even if closed later).
- Confusing “Asset Exchange” with “Change” in Net Assets (e.g., buying asset for cash: Net Assets do not change).
6) FAQ
How do I solve accounting equation exercises quickly?
Identify transaction type, write ΔAssets, ΔLiabilities, ΔEquity, then verify ΔAssets = ΔLiabilities + ΔEquity.
Do Revenue and Expenses affect Equity?
Yes: Revenue increases Equity, and Expenses decrease Equity (within the equation logic), then temporary accounts are closed later.
Does Cash Collection always mean Revenue?
No. Collection might be Accounts Receivable settlement, advance payment, or loan. Revenue depends on meeting conditions, not just receipt.
What are the most common mistakes in applying the equation?
Confusing Collection with Revenue, Payment with Expense, and not understanding that Payment reduces Liability while Expense reduces Equity.
7) Conclusion
The best way to master the equation isn’t memorizing, but solving Accounting Equation Exercises repeatedly. If you leave this article with one skill, let it be: Writing Changes (Δ) and ensuring ΔAssets = ΔLiabilities + ΔEquity. With time, you will find that the Equation has become a “language” to understand any financial transaction instantly.