Accounting Equation Exam Online (Free Test with Answers & Results)

Paying salaries decreases assets (cash) and decreases equity (expenses).

The purchase decreases one asset (cash) and increases another asset (building).

Buying supplies with cash decreases one asset (cash) and increases another asset (office supplies).

Dividends are distributions of earnings to shareholders and decrease retained earnings, which reduces equity.

Receiving a loan increases assets (cash) and liabilities (loan payable).

Liabilities are obligations that a company must settle in the future, often by transferring assets such as cash

Depreciation is an expense that reduces net income, thereby decreasing retained earnings and equity

The accounting equation must always balance, reflecting the dual aspect of every financial transaction.

The basic accounting equation is Assets = Liabilities + Equity, which represents the relationship between a company's assets, liabilities, and equity.

Retained earnings are accumulated profits that are part of shareholders' equity

Collecting accounts receivable shifts assets from accounts receivable to cash, so total assets remain unchanged.

Contingent liabilities are not recorded in the equation until they become probable and measurable

Liabilities are classified based on their due date as either current (short-term) or long-term.

Acquiring equipment on credit increases both assets (equipment) and liabilities (accounts payable).

According to the accounting equation, equity is calculated as assets minus liabilities: $500,000 - $300,000 = $200,000

Paying dividends decreases assets (cash) and decreases equity (retained earnings).

The accounting equation helps in understanding the balance between a company’s assets, liabilities, and equity, providing insight into its financial position.

Prepaid expenses are an asset, as they represent payments made in advance for goods or services

The balance sheet is often referred to as a statement of financial position, reflecting the accounting equation

The accounting equation applies to all forms of businesses, including sole proprietorships, partnerships, and corporations

This is the fundamental accounting equation that underpins the balance sheet. It shows that what a company owns is financed by either debt or equity

Investments by owners increase equity, not liabilities.

If equity increases and liabilities do not change, assets must increase to keep the accounting equation balanced

When equipment is purchased for cash, one asset (cash) decreases while another asset (equipment) increases, leaving total assets unchanged

Writing off bad debt decreases assets (accounts receivable) and decreases equity (expense).

Payment of expenses reduces net income, which decreases retained earnings, thereby reducing equity

Receiving cash for future services increases assets (cash) and creates a liability (unearned revenue).

Goodwill is recorded as an intangible asset, not a liability[

Purchasing inventory on credit increases both assets (inventory) and liabilities (accounts payable).

Equity represents the owners' claim on the assets of the company after all liabilities have been paid

Buying equipment increases assets (equipment) and liabilities (loan payable).

The accounting equation rearranged as Equity = Assets - Liabilities is commonly used to calculate shareholders' equity

Declaring dividends reduces retained earnings, which is part of equity.

Purchasing equipment with cash decreases cash but increases equipment, so total assets remain the same

Owner withdrawals decrease assets (cash) and decrease equity (drawings).

Expenses decrease equity, not liabilities, as they reduce net income and thus retained earnings

Equity is the residual interest in the assets of the entity after deducting liabilities.

Interest income increases assets (cash) and equity (revenue).

Non-profit organizations also use a form of the accounting equation, where net assets replace equity

Liabilities are the amounts a company owes to creditors and are part of the accounting equation

Accounts payable is a liability, not equity

When a company borrows money, it receives cash (an asset) and also records a liability for the loan, increasing both sides of the equation

The balance sheet is a detailed representation of the accounting equation, showing assets, liabilities, and equity

Borrowing increases cash (an asset) and the amount owed (a liability), leaving equity unchanged.

An increase in liabilities could be offset by an increase in assets, leaving equity unchanged[

Paying off a loan decreases both assets (cash) and liabilities (loan payable).

Expenses decrease assets (cash or bank account) and decrease equity (retained earnings).

Issuing shares increases the company's capital, which is part of equity.

Equity can increase through retained earnings without an immediate increase in assets

A cash sale increases assets (cash) and increases equity (revenue).