Accounting Equation True or False Quiz
Accounting Equation True or False Quiz
Financial Accounting Quiz

Accounting Equation True or False Quiz

Questions with Answers & Explanations

Accounting Equation True or False Questions

The correct answers are available at the bottom of this page. Try to answer all questions first, then scroll down to check your results and explanations.
  1. The accounting equation is Assets = Liabilities + Equity.
  2. Assets can exceed the sum of liabilities and equity.
  3. Equity can be calculated by subtracting liabilities from assets.
  4. The accounting equation only applies to corporations.
  5. Liabilities represent the company’s debts and obligations.
  6. Equity represents the owners’ claim after liabilities have been paid.
  7. The accounting equation is always in balance.
  8. When a company purchases equipment with cash, total assets remain unchanged.
  9. If liabilities increase, equity must decrease to keep the equation balanced.
  10. Revenue increases equity in the accounting equation.
  11. Expenses decrease liabilities in the accounting equation.
  12. Paying off a liability reduces both liabilities and assets.
  13. Dividends paid to shareholders reduce equity.
  14. The accounting equation can be used to assess a company’s financial health.
  15. If assets increase, and liabilities stay the same, equity must decrease.

Take the Accounting Equation True/False Quiz Online

Accounting Equation True or False Quiz

30 questions in 20 minutes

Pass Score 70%

1 / 30

The accounting equation can be used to assess a company's financial health.

2 / 30

The accounting equation can be used to derive the balance sheet.

3 / 30

The accounting equation is always in balance.

4 / 30

Liabilities represent the company's debts and obligations.

5 / 30

The accounting equation does not apply to non-profit organizations.

6 / 30

Unearned revenue is recorded as equity.

7 / 30

A balance sheet is also known as a statement of financial position.

8 / 30

The accounting equation is Assets = Liabilities + Equity.

9 / 30

Liabilities can be either current or long-term.

10 / 30

If assets increase, and liabilities stay the same, equity must decrease.

11 / 30

Dividends paid to shareholders reduce equity.

12 / 30

Retained earnings are part of equity.

13 / 30

Assets can exceed the sum of liabilities and equity.

14 / 30

A net loss will decrease equity.

15 / 30

When a company purchases equipment with cash, total assets remain unchanged.

16 / 30

Goodwill is recorded as a liability.

17 / 30

Depreciation of assets decreases equity.

18 / 30

If a company issues new shares, its equity will increase.

19 / 30

Equity can be calculated by subtracting liabilities from assets.

20 / 30

If equity increases, then assets must also increase.

21 / 30

The accounting equation does not account for contingencies.

22 / 30

Investments by owners increase liabilities.

23 / 30

Equity represents the owners' claim after liabilities have been paid.

24 / 30

Expenses decrease liabilities in the accounting equation.

25 / 30

Prepaid expenses are recorded as a liability.

26 / 30

Paying off a liability reduces both liabilities and assets.

27 / 30

Owner’s equity is always equal to total assets minus total liabilities.

28 / 30

Revenue increases equity in the accounting equation.

29 / 30

If liabilities increase, equity must decrease to keep the equation balanced.

30 / 30

The accounting equation only applies to corporations.

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Accounting Equation Quiz Answers Explained

  1. The accounting equation is Assets = Liabilities + Equity.
    • Answer: True
    • Explanation: 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.
  2. Assets can exceed the sum of liabilities and equity.
    • Answer: False
    • Explanation: According to the accounting equation, total assets must always equal the sum of liabilities and equity.
  3. Equity can be calculated by subtracting liabilities from assets.
    • Answer: True
    • Explanation: The accounting equation rearranged as Equity = Assets – Liabilities is commonly used to calculate shareholders’ equity.
  4. The accounting equation only applies to corporations.
    • Answer: False
    • Explanation: The accounting equation applies to all forms of businesses, including sole proprietorships, partnerships, and corporations.
  5. Liabilities represent the company’s debts and obligations.
    • Answer: True
    • Explanation: Liabilities are the amounts a company owes to creditors and are part of the accounting equation.
  6. Equity represents the owners’ claim after liabilities have been paid.
    • Answer: True
    • Explanation: Equity is the residual interest in the assets of the entity after deducting liabilities.
  7. The accounting equation is always in balance.
    • Answer: True
    • Explanation: The accounting equation must always balance, reflecting the dual aspect of every financial transaction.
  8. When a company purchases equipment with cash, total assets remain unchanged.
    • Answer: True
    • Explanation: Purchasing equipment with cash decreases cash but increases equipment, so total assets remain the same.
  9. If liabilities increase, equity must decrease to keep the equation balanced.
    • Answer: False
    • Explanation: An increase in liabilities could be offset by an increase in assets, leaving equity unchanged.
  10. Revenue increases equity in the accounting equation.
    • Answer: True
    • Explanation: Revenue increases net income, which in turn increases retained earnings and thus equity.
  11. Expenses decrease liabilities in the accounting equation.
    • Answer: False
    • Explanation: Expenses decrease equity, not liabilities, as they reduce net income and thus retained earnings.
  12. Paying off a liability reduces both liabilities and assets.
    • Answer: True
    • Explanation: When a liability is paid, cash (an asset) decreases, and the liability decreases.
  13. Dividends paid to shareholders reduce equity.
    • Answer: True
    • Explanation: Dividends are distributions of earnings to shareholders and decrease retained earnings, which reduces equity.
  14. The accounting equation can be used to assess a company’s financial health.
    • Answer: True
    • Explanation: The accounting equation helps in understanding the balance between a company’s assets, liabilities, and equity, providing insight into its financial position.
  15. If assets increase, and liabilities stay the same, equity must decrease.
    • Answer: False
    • Explanation: If assets increase while liabilities remain constant, equity must increase to balance the equation.

 

 

 

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