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

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

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

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).

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

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

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

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

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

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

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

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).

A net loss decreases retained earnings, which reduces equity.

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

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

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

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

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

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

Investments by owners increase equity, not liabilities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounts payable is a liability, not equity

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

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

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

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

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

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