Accounting Equation Practice Test Online

Table of Contents

Accounting Equation Questions

“Scroll down to see the correct answers with detailed explanations.”

Which of the following is the correct accounting equation?
- a) Assets = Liabilities – Equity
- b) Assets = Liabilities + Equity
- c) Assets + Equity = Liabilities
- d) Liabilities = Assets + Equity
What happens to the accounting equation when a company purchases equipment for cash?
- a) Total assets decrease
- b) Total assets remain the same
- c) Total liabilities increase
- d) Total equity decreases
Which of the following best describes equity?
- a) The amount of debt owed by the company
- b) The value of the company’s assets
- c) The residual interest in the assets after deducting liabilities
- d) The total amount of cash the company has
If a company’s assets total $500,000 and liabilities total $300,000, what is the amount of equity?
- a) $200,000
- b) $300,000
- c) $500,000
- d) $800,000
What is the effect on the accounting equation when a company borrows money from a bank?
- a) Increase in assets and increase in liabilities
- b) Increase in assets and decrease in liabilities
- c) Decrease in assets and increase in liabilities
- d) No effect on the accounting equation
Which of the following transactions will decrease equity?
- a) Payment of expenses
- b) Collection of accounts receivable
- c) Issuance of common stock
- d) Purchase of land
What is the effect on the accounting equation when inventory is purchased on credit?
- a) Increase in assets and increase in liabilities
- b) Decrease in assets and decrease in liabilities
- c) Increase in assets and decrease in equity
- d) No effect on the accounting equation
Which component of the accounting equation is affected when dividends are declared?
- a) Assets
- b) Liabilities
- c) Equity
- d) Revenue
If equity increases and liabilities remain constant, what must happen to assets?
- a) Assets must increase
- b) Assets must decrease
- c) Assets remain constant
- d) Cannot be determined
Which of the following best describes a liability?
- a) An economic resource owned by the company
- b) The residual interest in the company’s assets after deducting equity
- c) An obligation of the company to transfer resources to another entity
- d) A distribution of profits to shareholders

Accounting Equation Practice Test Online

Multiple Choice Questions
True/False Questions

Accounting Equation Practice Test Online

50 questions in 30 minutes

Pass Score 70%

1 / 50

If equity increases, then assets must also increase.

False

True

2 / 50

What is the effect on the accounting equation when a company writes off a $700 bad debt?

Assets increase and Equity increases

Assets increase and Liabilities decrease

Assets decrease and Liabilities increase

Assets decrease and Equity decreases

3 / 50

What happens to the accounting equation if a business incurs a $1,000 expense?

Assets decrease and Liabilities decrease

Assets increase and Equity increases

Assets increase and Liabilities increase

Assets decrease and Equity decreases

4 / 50

What effect does a cash sale have on the accounting equation?

Assets increase and Liabilities decrease

Assets increase and Equity increases

Assets decrease and Equity decreases

Assets decrease and Liabilities decrease

5 / 50

Equity represents the owners' claim after liabilities have been paid.

False

True

6 / 50

The accounting equation can be used to derive the balance sheet.

False

True

7 / 50

How does paying salaries of $20,000 affect the accounting equation ?

Assets increase and Equity increases

Assets increase and Liabilities increase

Assets decrease and Equity decreases

Assets decrease and Liabilities decrease

8 / 50

Accounts payable is a type of equity.

False

True

9 / 50

Investments by owners increase liabilities.

True

False

10 / 50

If a business owner withdraws $10,000 for personal use, what is the impact on the accounting equation ?

Assets increase and Liabilities increase

Assets decrease and Liabilities increase

Assets decrease and Equity decreases

Assets increase and Equity increases

11 / 50

If a company collects $5,500 in accounts receivable, what is the effect on the accounting equation ?

Assets decrease and Liabilities increase

Assets increase and Equity decreases

Assets increase and Liabilities decrease

Assets remain the same

12 / 50

If a company pays off a $2,000 loan, how is the accounting equation affected ?

Assets decrease and Equity increases

Assets increase and Equity decreases

Assets decrease and Liabilities decrease

Assets increase and Liabilities increase

13 / 50

Prepaid expenses are recorded as a liability.

False

True

14 / 50

Which component of the accounting equation is affected when dividends are declared ?

Equity

Assets

Revenue

Liabilities

15 / 50

If equity increases and liabilities remain constant, what must happen to assets ?

Cannot be determined

Assets must increase

Assets must decrease

Assets remain constant

16 / 50

Which of the following best describes a liability?

An obligation of the company to transfer resources to another entity

A distribution of profits to shareholders

The residual interest in the company’s assets after deducting equity

An economic resource owned by the company

17 / 50

When a company purchases equipment with cash, total assets remain unchanged.

False

True

18 / 50

What is the effect on the accounting equation when inventory is purchased on credit ?

Decrease in assets and decrease in liabilities

Increase in assets and decrease in equity

No effect on the accounting equation

Increase in assets and increase in liabilities

19 / 50

If a company sells an asset for $1,200 that originally cost $800, how is the accounting equation affected ?

Assets decrease and Equity increases by $400

Assets increase and Equity increases by $400

Assets increase and Equity decreases by $400

Assets increase and Equity increases by $800

20 / 50

When a company receives $15,000 for services to be performed in the future, how is the accounting equation affected ?

Assets increase and Equity increases

Assets decrease and Equity increases

Assets decrease and Liabilities decrease

Assets increase and Liabilities increase

21 / 50

Depreciation of assets decreases equity.

True

False

22 / 50

Unearned revenue is recorded as equity.

False

True

23 / 50

Paying off a liability reduces both liabilities and assets.

True

False

24 / 50

If liabilities increase, equity must decrease to keep the equation balanced.

True

False

25 / 50

If a business buys office supplies for $500 in cash, what happens to the accounting equation ?

Assets increase and Liabilities decrease

Assets increase and Equity decreases

Assets decrease and Liabilities decrease

Assets decrease and Assets increase

26 / 50

If a company issues new shares, its equity will increase.

False

True

27 / 50

What happens to the accounting equation if a company buys equipment for $50,000 and pays with a bank loan?

Assets decrease and Liabilities increase

Assets increase and Liabilities increase

Assets increase and Equity decreases

Assets decrease and Liabilities decrease

28 / 50

What happens to the accounting equation when a company earns $1000 in interest income?

Assets increase and Equity increases

Assets increase and Liabilities decrease

Assets decrease and Equity decreases

Assets decrease and Liabilities increase

29 / 50

Borrowing money increases liabilities and assets.

True

False

30 / 50

Liabilities can be either current or long-term.

True

False

31 / 50

Owner’s equity is always equal to total assets minus total liabilities.

False

True

32 / 50

Retained earnings are part of equity.

False

True

33 / 50

The accounting equation is always in balance.

False

True

34 / 50

If assets increase, and liabilities stay the same, equity must decrease.

True

False

35 / 50

If a company purchases inventory worth $10,000 on credit, what is the effect on the accounting equation ?

Assets increase and Liabilities increase

Assets increase and Equity decreases

Assets decrease and Liabilities increase

Assets decrease and Liabilities decrease

36 / 50

What happens to the accounting equation when a company purchases equipment for cash?

Total assets decrease

Total assets remain the same

Total equity decreases

Total liabilities increase

37 / 50

Expenses decrease liabilities in the accounting equation.

False

True

38 / 50

A net loss will decrease equity.

False

True

39 / 50

What is the effect on the accounting equation when a company pays a utility bill of $900?

Assets decrease and Liabilities decrease

Assets increase and Equity increases

Assets increase and Liabilities increase

Assets decrease and Equity decreases

40 / 50

Equity can be calculated by subtracting liabilities from assets.

False

True

41 / 50

How does issuing common stock for $10,000 impact the accounting equation ?

Assets increase and Liabilities decrease

Assets decrease and Liabilities increase

Assets increase and Equity increases

Assets decrease and Equity decreases

42 / 50

Which of the following is the basic accounting equation?

Assets = Liabilities - Equity

Assets = Liabilities + Equity

Assets = Revenue + Expenses

Assets = Equity - Liabilities

43 / 50

What happens to the accounting equation when a company receives a loan of $100,000?

Assets decrease and Liabilities increase

Assets increase and Liabilities increase

Assets increase and Equity increases

Assets decrease and Liabilities decrease

44 / 50

Which of the following is the correct accounting equation?

Assets + Equity = Liabilities

Assets = Liabilities - Equity

Liabilities = Assets + Equity

Assets = Liabilities + Equity

45 / 50

If a company pays a $3,000 dividend to shareholders, what is the impact on the accounting equation ?

Assets increase and Liabilities increase

Assets increase and Equity decreases

Assets decrease and Equity decreases

Assets decrease and Liabilities decrease

46 / 50

Dividends paid to shareholders reduce equity.

False

True

47 / 50

The accounting equation does not account for contingencies.

False

True

48 / 50

If a business acquires $5,000 in equipment on credit, what happens to the accounting equation?

Assets increase and Equity increases

Assets decrease and Liabilities increase

Assets decrease and Liabilities decrease

Assets increase and Liabilities increase

49 / 50

Assets can exceed the sum of liabilities and equity.

True

False

50 / 50

Revenue increases equity in the accounting equation.

False

True

Your score is

Accounting Equation Questionswith Answers

Which of the following is the correct accounting equation?
- a) Assets = Liabilities – Equity
- b) Assets = Liabilities + Equity
- c) Assets + Equity = Liabilities
- d) Liabilities = Assets + Equity
- Answer: b) Assets = Liabilities + Equity
- Explanation: The accounting equation represents the relationship between a company’s assets, liabilities, and equity. It ensures that a company’s balance sheet is always balanced.
What happens to the accounting equation when a company purchases equipment for cash?
- a) Total assets decrease
- b) Total assets remain the same
- c) Total liabilities increase
- d) Total equity decreases
- Answer: b) Total assets remain the same
- Explanation: When equipment is purchased for cash, one asset (cash) decreases while another asset (equipment) increases, leaving total assets unchanged.
Which of the following best describes equity?
- a) The amount of debt owed by the company
- b) The value of the company’s assets
- c) The residual interest in the assets after deducting liabilities
- d) The total amount of cash the company has
- Answer: c) The residual interest in the assets after deducting liabilities
- Explanation: Equity represents the owners’ claim on the assets of the company after all liabilities have been paid.
If a company’s assets total $500,000 and liabilities total $300,000, what is the amount of equity?
- a) $200,000
- b) $300,000
- c) $500,000
- d) $800,000
- Answer: a) $200,000
- Explanation: According to the accounting equation, equity is calculated as assets minus liabilities: $500,000 – $300,000 = $200,000.
What is the effect on the accounting equation when a company borrows money from a bank?
- a) Increase in assets and increase in liabilities
- b) Increase in assets and decrease in liabilities
- c) Decrease in assets and increase in liabilities
- d) No effect on the accounting equation
- Answer: a) Increase in assets and increase in liabilities
- Explanation: When a company borrows money, it receives cash (an asset) and also records a liability for the loan, increasing both sides of the equation.
Which of the following transactions will decrease equity?
- a) Payment of expenses
- b) Collection of accounts receivable
- c) Issuance of common stock
- d) Purchase of land
- Answer: a) Payment of expenses
- Explanation: Payment of expenses reduces net income, which decreases retained earnings, thereby reducing equity.
What is the effect on the accounting equation when inventory is purchased on credit?
- a) Increase in assets and increase in liabilities
- b) Decrease in assets and decrease in liabilities
- c) Increase in assets and decrease in equity
- d) No effect on the accounting equation
- Answer: a) Increase in assets and increase in liabilities
- Explanation: Purchasing inventory on credit increases the inventory account (an asset) and also increases accounts payable (a liability).
Which component of the accounting equation is affected when dividends are declared?
- a) Assets
- b) Liabilities
- c) Equity
- d) Revenue
- Answer: c) Equity
- Explanation: Declaring dividends reduces retained earnings, which is part of equity.
If equity increases and liabilities remain constant, what must happen to assets?
- a) Assets must increase
- b) Assets must decrease
- c) Assets remain constant
- d) Cannot be determined
- Answer: a) Assets must increase
- Explanation: If equity increases and liabilities do not change, assets must increase to keep the accounting equation balanced.
Which of the following best describes a liability?
- a) An economic resource owned by the company
- b) The residual interest in the company’s assets after deducting equity
- c) An obligation of the company to transfer resources to another entity
- d) A distribution of profits to shareholders
- Answer: c) An obligation of the company to transfer resources to another entity
- Explanation: Liabilities are obligations that a company must settle in the future, often by transferring assets such as cash.