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

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

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

When a liability is paid, cash (an asset) decreases, and the liability decreases.

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

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

Purchasing inventory on credit increases the inventory account (an asset) and also increases accounts payable (a liability)

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

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

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

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

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

This is the definition of owner’s equity according to the accounting equation

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

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

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

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

If assets increase while liabilities remain constant, equity must increase to balance the equation

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

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

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

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

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

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

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

Unearned revenue is a liability until the service is performed or the product is delivered.

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

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

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

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

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

Investments by owners increase equity, not liabilities.

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

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

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

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

A net loss decreases retained earnings, which reduces equity.

According to the accounting equation, total assets must always equal the sum of liabilities and equity

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

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

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

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

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

Selling an asset for more than its cost increases assets (cash) and equity (gain).

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

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

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

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

Paying a utility bill decreases assets (cash) and decreases equity (expenses).

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

Issuing common stock increases both assets (cash) and equity (common stock).