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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Investments by owners increase equity, not liabilities.

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

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

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

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

A net loss decreases retained earnings, which reduces equity.

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

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

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

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

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

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

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

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

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

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

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

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).

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

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

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

Accounts payable is a liability, not equity

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

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

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

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

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

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

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

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