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

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

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

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

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

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

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

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

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

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

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

Investments by owners increase equity, not liabilities.

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

A net loss decreases retained earnings, which reduces equity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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