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

Investments by owners increase equity, not liabilities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revenue increases net income, which in turn increases retained earnings and thus equity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A net loss decreases retained earnings, which reduces equity.

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

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

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