Basic Accounting Equation True or False Quiz (Questions 1–50)

Introduction

The Basic Accounting Equation is the foundation of financial accounting and the double-entry bookkeeping system. It states that:

Assets = Liabilities + Owner’s Equity

This True or False quiz will test your understanding of assets, liabilities, equity, and how transactions affect the accounting equation. Each statement includes the correct answer and a detailed explanation to reinforce learning.

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Questions 1–10

1. The basic accounting equation is Assets = Liabilities + Owner’s Equity.

Answer: True

Explanation:
This is the fundamental accounting equation. It shows that all business resources (assets) are financed either by creditors (liabilities) or owners (equity).

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2. Liabilities represent resources owned by the business.

Answer: False

Explanation:
Liabilities are obligations owed to creditors. Assets, not liabilities, represent resources owned or controlled by the business.

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3. Owner’s equity is the residual interest in assets after deducting liabilities.

Answer: True

Explanation:
Owner’s Equity = Assets − Liabilities. It represents the owner’s claim on the business.

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4. Cash is classified as an asset.

Answer: True

Explanation:
Cash provides future economic benefits and is one of the most liquid assets.

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5. Accounts Payable is an asset account.

Answer: False

Explanation:
Accounts Payable represents amounts owed to suppliers and is classified as a liability.

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6. Every accounting transaction must keep the accounting equation balanced.

Answer: True

Explanation:
The accounting equation must remain balanced after every transaction, which is the basis of double-entry accounting.

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7. Assets can never decrease.

Answer: False

Explanation:
Assets may increase or decrease depending on transactions such as paying cash, selling equipment, or collecting receivables.

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8. A bank loan increases liabilities.

Answer: True

Explanation:
Borrowing money creates an obligation to repay, increasing liabilities.

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9. Equity can be calculated as Assets minus Liabilities.

Answer: True

Explanation:
This is a rearranged version of the accounting equation.

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10. Inventory is considered a liability.

Answer: False

Explanation:
Inventory is a current asset because it is held for sale in normal business operations.

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Questions 11–20

11. Owner investments increase owner’s equity.

Answer: True

Explanation:
Capital contributions increase the owner’s claim in the business.

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12. Revenue decreases owner’s equity.

Answer: False

Explanation:
Revenue increases net income, which ultimately increases equity.

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13. Expenses reduce owner’s equity.

Answer: True

Explanation:
Expenses decrease net income, reducing retained earnings and equity.

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14. Assets are economic resources controlled by a business.

Answer: True

Explanation:
Assets provide future benefits and are controlled by the company.

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15. If liabilities increase by $5,000 and assets increase by $5,000, the accounting equation remains balanced.

Answer: True

Explanation:
Both sides increase equally, preserving balance.

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16. Equipment is an example of a long-term asset.

Answer: True

Explanation:
Equipment provides benefits over multiple accounting periods and is classified as a non-current asset.

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17. Accounts Receivable is a liability.

Answer: False

Explanation:
Accounts Receivable represents money owed by customers and is an asset.

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18. Paying a creditor reduces liabilities.

Answer: True

Explanation:
When a business pays what it owes, the liability decreases.

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19. Equity and liabilities both represent claims against assets.

Answer: True

Explanation:
Creditors have claims through liabilities, while owners have claims through equity.

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20. The accounting equation applies only to large corporations.

Answer: False

Explanation:
The equation applies to all business entities regardless of size.

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Questions 21–30

21. Purchasing equipment with cash affects only asset accounts.

Answer: True

Explanation:
Cash decreases while equipment increases. Total assets remain unchanged.

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22. Borrowing money increases both assets and liabilities.

Answer: True

Explanation:
Cash increases while the loan payable increases.

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23. A business with no liabilities has equity equal to total assets.

Answer: True

Explanation:
If liabilities are zero, Assets = Equity.

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24. Owner withdrawals increase equity.

Answer: False

Explanation:
Withdrawals reduce the owner’s investment and decrease equity.

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25. Cash collected from customers increases assets.

Answer: True

Explanation:
Cash is an asset and increases when received.

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26. The accounting equation can be written as Equity = Assets − Liabilities.

Answer: True

Explanation:
This is a common rearrangement used to calculate owner’s equity.

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27. Revenue and expenses indirectly affect equity.

Answer: True

Explanation:
They impact net income, which ultimately changes equity.

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28. Liabilities are obligations owed to external parties.

Answer: True

Explanation:
Examples include loans, accounts payable, and accrued expenses.

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29. Assets always equal liabilities.

Answer: False

Explanation:
Assets equal liabilities plus equity, not liabilities alone.

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30. Notes Payable is a liability account.

Answer: True

Explanation:
Notes Payable represents formal debt obligations.

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Questions 31–40

31. The accounting equation is the basis of double-entry bookkeeping.

Answer: True

Explanation:
Every debit and credit entry maintains equation balance.

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32. An increase in assets always increases equity.

Answer: False

Explanation:
Assets may increase due to liabilities, such as borrowing money.

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33. Supplies owned by a company are assets.

Answer: True

Explanation:
Supplies provide future economic benefits and are classified as assets.

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34. A business can have liabilities without having assets.

Answer: False

Explanation:
Liabilities arise from transactions involving assets or services received.

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35. Paying rent with cash decreases assets and equity.

Answer: True

Explanation:
Cash decreases and the rent expense reduces equity.

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36. Retained earnings are part of owner’s equity.

Answer: True

Explanation:
Retained earnings represent accumulated profits kept in the business.

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37. Equity is sometimes called net assets.

Answer: True

Explanation:
Net assets equal assets minus liabilities.

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38. Accounts Payable increases when goods are purchased on credit.

Answer: True

Explanation:
The business owes suppliers for the purchase.

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39. Assets are claims against creditors.

Answer: False

Explanation:
Creditors have claims against assets, not the reverse.

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40. The accounting equation helps ensure accurate financial records.

Answer: True

Explanation:
Maintaining balance improves reliability and accuracy.

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Questions 41–50

41. Cash payments on a loan reduce liabilities.

Answer: True

Explanation:
Loan balances decrease when principal payments are made.

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42. Owner investments decrease equity.

Answer: False

Explanation:
Investments increase owner’s equity.

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43. A profitable company generally experiences an increase in equity.

Answer: True

Explanation:
Profits increase retained earnings, a component of equity.

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44. Liabilities represent ownership interest in a business.

Answer: False

Explanation:
Ownership interest is represented by equity, not liabilities.

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45. Assets must always equal total claims against those assets.

Answer: True

Explanation:
Total claims consist of liabilities and equity.

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46. Inventory purchased on account increases both assets and liabilities.

Answer: True

Explanation:
Inventory increases while Accounts Payable increases.

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47. The accounting equation is unaffected by business transactions.

Answer: False

Explanation:
Transactions affect accounts but must maintain the equation’s balance.

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48. Equity can become negative if liabilities exceed assets.

Answer: True

Explanation:
Negative equity occurs when obligations exceed resources.

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49. The accounting equation is important for preparing financial statements.

Answer: True

Explanation:
It forms the basis of the balance sheet and financial reporting.

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50. Understanding the accounting equation is essential for learning accounting.

Answer: True

Explanation:
The accounting equation is one of the first and most important concepts in accounting because it explains the relationship between assets, liabilities, and equity and serves as the foundation for all accounting records.

Basic Accounting Equation: The Foundation of Modern Finance

In the world of finance and business, the Basic Accounting Equation is the bedrock upon which all financial reporting is built. Also known as the balance sheet equation, it represents the relationship between a company’s assets, liabilities, and owner’s equity. It ensures that a business’s financial records remain perfectly balanced, providing an accurate snapshot of its financial health.

The Core Formula

The equation is elegantly simple:

To truly understand this equation, we must break down its three fundamental components:

1. Assets

Assets are the economic resources owned or controlled by a business that are expected to provide future economic benefits. Examples include:

• Cash and Cash Equivalents

• Accounts Receivable (money owed by customers)

• Inventory (goods available for sale)

• Property, Plant, and Equipment (PP&E)

2. Liabilities

Liabilities are the company’s financial obligations—what it owes to outside parties. These are claims against the company’s assets by creditors. Examples include:

• Accounts Payable (money owed to suppliers)

• Notes Payable (formal loan agreements)

• Wages Payable (money owed to employees)

3. Equity

Often referred to as Owner’s Equity or Shareholders’ Equity, this represents the net worth of the company. It is the residual interest in the assets after deducting all liabilities ($\text{Equity} = \text{Assets} – \text{Liabilities}$). Equity increases through owner investments and revenues, and decreases through owner drawings (or dividends) and expenses.

Why the Equation Always Balances

The accounting equation must always balance because of the double-entry bookkeeping system. Every business transaction affects at least two accounts. For example, if a company takes out a $\$10,000$ bank loan, its Assets (Cash) increase by $\$10,000$, and its Liabilities (Notes Payable) also increase by $\$10,000$. The equation remains perfectly in balance.

Without this equation, creating financial statements like the Balance Sheet or Income Statement would be impossible, making it the most critical concept for any aspiring accountant or business owner to master.

50 True/False Questions on the Basic Accounting Equation

Group 1: Core Definitions and Concepts (Questions 1-10)

Q1. The basic accounting equation is $\text{Assets} = \text{Liabilities} – \text{Equity}$.

• Answer: False

• Explanation: The correct equation is $\text{Assets} = \text{Liabilities} + \text{Equity}$. Liabilities and Equity represent the sources that finance the assets.

Q2. Another name for the basic accounting equation is the balance sheet equation.

• Answer: True

• Explanation: The equation directly mirrors the structure of a Balance Sheet, which lists assets on one side, and liabilities and equity on the other.

Q3. Creditors have the first claim over the assets of a business before the owners.

• Answer: True

• Explanation: Liabilities represent legal obligations to outsiders (creditors). In liquidation, creditors are paid first before owners receive residual equity.

Q4. Accounts Receivable is classified as a liability because the business is waiting to receive money.

• Answer: False

• Explanation: Accounts Receivable is an Asset. It represents an economic resource (money to be collected in the future) owned by the business.

Q5. Equity can be calculated as $\text{Assets} – \text{Liabilities}$.

• Answer: True

• Explanation: By mathematically rearranging the basic formula ($\text{A} = \text{L} + \text{E}$), we get $\text{E} = \text{A} – \text{L}$. This represents the residual value belonging to the owners.

Q6. The basic accounting equation applies only to large corporations and not to small sole proprietorships.

• Answer: False

• Explanation: The accounting equation is a universal principle that applies to all economic entities, regardless of size or legal structure.

Q7. Prepaid Expenses are considered liabilities because the service has not been received yet.

• Answer: False

• Explanation: Prepaid Expenses are Assets. They represent a future economic benefit (services or goods to be received later for which payment has already been made).

Q8. Unearned Revenue is classified as a liability.

• Answer: True

• Explanation: Unearned Revenue is a liability because the company has received money but still owes the customer the actual product or service.

Q9. Double-entry accounting means that every transaction must be recorded twice in separate journals.

• Answer: False

• Explanation: Double-entry means every transaction affects at least two different accounts to keep the accounting equation in balance, not that it is written down twice for duplication.

Q10. Capital represents the owner’s investment in the business.

• Answer: True

• Explanation: Capital (or Owner’s Capital) is the primary component of Equity, reflecting the net wealth contributed by owners to the business.

Group 2: Impact of Transactions on Assets & Liabilities (Questions 11-20)

Q11. Purchasing equipment for cash increases total assets.

• Answer: False

• Explanation: This is an asset exchange. Cash (Asset) decreases, and Equipment (Asset) increases by the same amount. Total assets remain unchanged.

Q12. Purchasing inventory on account increases both total assets and total liabilities.

• Answer: True

• Explanation: Inventory (Asset) increases, and Accounts Payable (Liability) increases. Both sides of the equation increase equally.

Q13. Paying off a bank loan decreases cash and decreases liabilities.

• Answer: True

• Explanation: Cash (Asset) goes down, and Notes Payable (Liability) goes down. The equation remains balanced.

Q14. Collecting cash from a customer who owed money on account increases total assets.

• Answer: False

• Explanation: This transaction increases Cash (Asset) and decreases Accounts Receivable (Asset). The net effect on total assets is zero.

Q15. Borrowing money from a bank increases assets and increases equity.

• Answer: False

• Explanation: It increases Cash (Asset) and increases Notes Payable (Liability), not equity.

Q16. If a business returns damaged goods purchased on credit, both assets and liabilities decrease.

• Answer: True

• Explanation: Inventory (Asset) decreases, and Accounts Payable (Liability) decreases because the company no longer owes money for those returned goods.

Q17. The sale of old office furniture at its exact book value for cash changes the total amount of assets.

• Answer: False

• Explanation: Cash (Asset) increases, and Furniture (Asset) decreases by the same amount. Total assets remain exactly the same.

Q18. Signing a lease contract to rent an office next month immediately changes the accounting equation.

• Answer: False

• Explanation: Merely signing an agreement for a future event is an exchange of promises, not an accounting transaction. No assets or liabilities are exchanged yet.

Q19. Paying an outstanding account payable decreases liabilities and decreases assets.

• Answer: True

• Explanation: Cash (Asset) is reduced, and Accounts Payable (Liability) is reduced by the same amount.

Q20. If a company buys a delivery truck by paying $20\%$ cash and financing the rest with a loan, total assets increase by the full cost of the truck.

• Answer: False

• Explanation: While the truck increases assets by $100\%$, cash decreases by $20\%$. Therefore, net total assets increase only by the $80\%$ financed amount (which matches the increase in liabilities).

Group 3: Impact of Revenues, Expenses, and Equity (Questions 21-30)

Q21. Revenues increase owner’s equity.

• Answer: True

• Explanation: Revenues represent inflows of assets resulting from providing goods or services, which ultimately increases the net wealth (Equity) of the owners.

Q22. Expenses decrease liabilities.

• Answer: False

• Explanation: Expenses decrease Equity. If an expense is unpaid, it actually increases liabilities (e.g., Utilities Payable).

Q23. Owner withdrawals (drawings) decrease total assets and decrease equity.

• Answer: True

• Explanation: When an owner takes cash out for personal use, Cash (Asset) goes down, and Owner’s Drawings (which reduces Equity) goes down.

Q24. Performing a service for a client on account increases accounts receivable and increases revenue.

• Answer: True

• Explanation: Accounts Receivable (Asset) increases, and Revenue increases, which in turn increases Equity. The equation balances.

Q25. Paying cash for this month’s rent decreases assets and decreases equity.

• Answer: True

• Explanation: Cash (Asset) decreases, and Rent Expense decreases Equity.

Q26. An increase in an expense account always results in an immediate decrease in cash.

• Answer: False

• Explanation: Expenses can be incurred on credit (on account), which increases a liability (Accounts Payable) instead of reducing cash immediately.

Q27. The expanded accounting equation is: $\text{Assets} = \text{Liabilities} + \text{Capital} – \text{Drawings} + \text{Revenues} – \text{Expenses}$.

• Answer: True

• Explanation: This is the correct expanded form, showing exactly how changes in revenues, expenses, and drawings affect the core Equity component.

Q28. Net income increases equity.

• Answer: True

• Explanation: Net income ($\text{Revenues} – \text{Expenses}$) is added to equity at the end of the accounting period through closing entries.

Q29. Net loss increases liabilities.

• Answer: False

• Explanation: A net loss means expenses exceeded revenues, which directly decreases Equity, not liabilities.

Q30. Owner’s investment of personal equipment into the business increases assets and increases equity.

• Answer: True

• Explanation: The business gains an asset (Equipment) and the owner’s claim/investment (Capital/Equity) increases by the same valuation.

Group 4: Mathematical Problems and Rearrangements (Questions 31-40)

Q31. If total assets are $\$50,000$ and liabilities are $\$20,000$, equity must be $\$70,000$.

• Answer: False

• Explanation: $\text{Equity} = \text{Assets} – \text{Liabilities} = \$50,000 – \$20,000 = \$30,000$.

Q32. If liabilities increased by $\$10,000$ and equity decreased by $\$3,000$, assets must have increased by $\$7,000$.

• Answer: True

• Explanation: $\Delta \text{Assets} = \Delta \text{Liabilities} + \Delta \text{Equity} = (+\$10,000) + (-\$3,000) = +\$7,000$.

Q33. If assets increase by $\$5,000$ and liabilities increase by $\$5,000$, equity remains unchanged.

• Answer: True

• Explanation: Both sides of the equation changed by the same amount ($+\$5,000$). Therefore, Equity does not need to change to keep the balance.

Q34. If total assets double, liabilities and equity must both double as well.

• Answer: False

• Explanation: Not necessarily. Total assets could double because only liabilities doubled, or only equity doubled, or any combination thereof.

Q35. If a company has assets of $\$100,000$ and equity of $\$60,000$, its liabilities are $\$40,000$.

• Answer: True

• Explanation: $\text{Liabilities} = \text{Assets} – \text{Equity} = \$100,000 – \$60,000 = \$40,000$.

Q36. If a business has zero liabilities, its total assets equal its total equity.

• Answer: True

• Explanation: If $\text{Liabilities} = 0$, then the equation becomes $\text{Assets} = 0 + \text{Equity}$, meaning $\text{Assets} = \text{Equity}$.

Q37. During a period, if assets decrease by $\$8,000$ and equity increases by $\$2,000$, liabilities must have decreased by $\$10,000$.

• Answer: True

• Explanation: $-\$8,000 = \Delta \text{Liabilities} + \$2,000 \rightarrow \Delta \text{Liabilities} = -\$8,000 – \$2,000 = -\$10,000$.

Q38. If a company’s assets decrease, its equity must always decrease.

• Answer: False

• Explanation: An asset decrease could be offset by a decrease in liabilities (e.g., paying off a bill), leaving equity unchanged.

Q39. If a firm’s total assets equal $\$15,000$ and total liabilities equal $\$18,000$, the firm has negative equity of $-\$3,000$.

• Answer: True

• Explanation: $\text{Equity} = \$15,000 – \$18,000 = -\$3,000$. This indicates insolvency, where liabilities exceed assets.

Q40. If revenues are $\$12,000$ and expenses are $\$15,000$, equity will increase by $\$3,000$.

• Answer: False

• Explanation: Because expenses exceed revenues, there is a net loss of $\$3,000$, which decreases equity.

Group 5: Advanced Scenarios and Errors (Questions 41-50)

Q41. If a transaction is completely omitted from the records, the accounting equation will still balance.

• Answer: True

• Explanation: While the financial records will be incorrect and incomplete, the equation itself will mathematically stay in balance because neither side was changed.

Q42. Recording an asset purchase as an expense will cause the accounting equation to be out of balance.

• Answer: False

• Explanation: It will balance, but it will be error-ridden. It decreases equity (via expense) and decreases cash (asset). The equation balances, but net income and assets are understated.

Q43. Drawings or dividends are considered operating expenses of a business.

• Answer: False

• Explanation: Drawings/dividends are a distribution of profits to owners and are not expenses incurred to generate revenue. However, they do reduce equity directly.

Q44. The fundamental accounting equation can temporarily be out of balance during the middle of the day before adjustments are made.

• Answer: False

• Explanation: The accounting equation must always be in balance after the entry of any transaction. There is never a moment in double-entry bookkeeping where it is legally or technically out of balance.

Q45. A company cannot have more liabilities than assets.

• Answer: False

• Explanation: A company can have more liabilities than assets; this results in negative equity, often a sign of financial distress or impending bankruptcy.

Q46. An adjustment to record depreciation expense decreases assets and decreases equity.

• Answer: True

• Explanation: Depreciation increases Depreciation Expense (which lowers Equity) and increases Accumulated Depreciation (a contra-asset that reduces total Assets).

Q47. If cash is collected in advance for a service to be performed next year, revenue should be recorded immediately to balance the cash asset.

• Answer: False

• Explanation: To balance the cash asset, a liability account called Unearned Revenue is credited. Revenue is not recognized until it is earned.

Q48. Buying supplies on credit and agreeing to pay next month does not affect equity.

• Answer: True

• Explanation: This transaction increases Supplies (Asset) and increases Accounts Payable (Liability). Equity is not affected until the supplies are actually used up (which creates an expense).

Q49. The accounting equation represents a flow of funds over a period of time.

• Answer: False

• Explanation: The accounting equation represents a financial snapshot at a specific point in time, which is exactly what a Balance Sheet represents.

Q50. If an accountant records a payment of $\$500$ cash for utility bills by decreasing cash by $\$50$ and decreasing equity by $\$500$, the equation will remain in balance.

• Answer: False

• Explanation: The left side (Assets) decreases by $\$50$, while the right side (Equity) decreases by $\$500$. The equation is out of balance by $\$450$.

Basic Accounting Equation Quiz: 50 True or False Questions

The Basic Accounting Equation (Assets = Liabilities + Owner’s Equity) is the foundation of double-entry bookkeeping and the balance sheet. Test your understanding with these 50 True/False questions. Each question includes the correct answer and a detailed explanation.

Questions 1–15: Basic Concepts

1. The Basic Accounting Equation is Assets = Liabilities + Owner’s Equity. Answer: True Explanation: This is the fundamental accounting equation. It shows that all resources owned by the business (assets) are financed either by creditors (liabilities) or by the owners (equity). The equation must always balance.

2. Assets represent what the business owes to outsiders. Answer: False Explanation: Assets are resources owned or controlled by the business that have future economic value. What the business owes is represented by Liabilities.

3. Owner’s Equity is the owner’s residual claim on the business assets after deducting liabilities. Answer: True Explanation: Equity = Assets – Liabilities. It represents the owner’s interest in the business.

4. The accounting equation only applies to corporations. Answer: False Explanation: The equation applies to all types of businesses — sole proprietorships, partnerships, and corporations.

5. Liabilities are present obligations that will result in an outflow of resources. Answer: True Explanation: Liabilities arise from past events and require future settlement through payment or provision of services.

6. Cash is the only asset a business can have. Answer: False Explanation: Businesses can have many assets including inventory, equipment, buildings, accounts receivable, and prepaid expenses.

7. The Balance Sheet is a financial statement that directly represents the Basic Accounting Equation. Answer: True Explanation: The Balance Sheet shows Assets on one side and Liabilities + Equity on the other side at a specific point in time.

8. Owner’s Equity increases only when the owner invests more cash. Answer: False Explanation: Equity also increases through profitable operations (revenues > expenses) and decreases with losses or withdrawals.

9. The accounting equation is based on the double-entry bookkeeping system. Answer: True Explanation: Every transaction affects at least two accounts, ensuring the equation remains balanced.

10. Accounts Receivable is considered a liability. Answer: False Explanation: Accounts Receivable is an asset because it represents money owed to the business by customers.

11. Paying a liability with cash increases Owner’s Equity. Answer: False Explanation: It decreases Assets (cash) and decreases Liabilities by the same amount. Equity is unaffected.

12. The Basic Accounting Equation can be rearranged as Liabilities = Assets – Equity. Answer: True Explanation: This is a valid rearrangement used when preparing financial statements or analyzing financial position.

13. Personal transactions of the owner are recorded in the business’s accounting equation. Answer: False Explanation: Only business-related transactions are recorded. Personal transactions are kept separate (business entity concept).

14. Revenue increases Owner’s Equity. Answer: True Explanation: Revenue increases net income, which ultimately increases Owner’s Equity.

15. Expenses have no effect on the accounting equation. Answer: False Explanation: Expenses decrease net income and therefore decrease Owner’s Equity.

Questions 16–35: Transaction Analysis

16. Buying equipment on credit increases both Assets and Liabilities. Answer: True Explanation: Equipment (asset) increases and Notes Payable or Accounts Payable (liability) increases.

17. Owner withdrawal of cash decreases Assets and decreases Owner’s Equity. Answer: True Explanation: Cash decreases and Drawings reduce the owner’s capital account.

18. Collecting cash from a customer on account affects total Assets. Answer: False Explanation: Cash increases while Accounts Receivable decreases. Total assets remain the same.

19. Recording depreciation decreases Assets and decreases Owner’s Equity. Answer: True Explanation: Net book value of the asset decreases and depreciation expense reduces net income (equity).

20. Borrowing money from a bank increases Assets and Owner’s Equity. Answer: False Explanation: It increases Assets (cash) and Liabilities (loan payable).

21. Providing services on credit increases Assets and increases Owner’s Equity. Answer: True Explanation: Accounts Receivable increases and Revenue increases equity.

22. Purchasing supplies for cash has no effect on total Assets. Answer: True Explanation: One asset (cash) decreases while another asset (supplies) increases by the same amount.

23. A net loss decreases both Assets and Owner’s Equity. Answer: True Explanation: Losses reduce equity and typically reduce net assets.

24. Paying salaries in cash decreases Assets and decreases Liabilities. Answer: False Explanation: It decreases Assets (cash) and decreases Owner’s Equity (expense).

25. Issuing a note payable to purchase land increases Assets and Liabilities. Answer: True Explanation: Both the land asset and the liability increase.

26. Owner investment of cash increases Assets and Liabilities. Answer: False Explanation: It increases Assets and Owner’s Equity.

27. Paying accounts payable decreases Assets and decreases Liabilities. Answer: True Explanation: Cash and the payable liability both decrease.

28. Prepaid rent is recorded as a liability. Answer: False Explanation: Prepaid rent is an asset because it represents future economic benefits.

29. Accrued expenses increase Liabilities and decrease Owner’s Equity. Answer: True Explanation: The expense reduces equity while creating a liability.

30. Selling goods for cash increases Assets and Owner’s Equity. Answer: True Explanation: Cash increases and revenue increases equity (after considering cost of goods sold if applicable).

31. The accounting equation remains in balance after every correctly recorded transaction. Answer: True Explanation: This is the core principle of double-entry accounting.

32. Dividends paid to shareholders increase Owner’s Equity. Answer: False Explanation: Dividends (or withdrawals) decrease equity.

33. Increasing liabilities without changing assets will increase equity. Answer: False Explanation: Equity would decrease to keep the equation balanced.

34. The accounting equation helps detect errors in the accounting records. Answer: True Explanation: If the equation does not balance, there must be a recording error.

35. Revenue and Owner’s investment both increase equity in the same way. Answer: False Explanation: Revenue comes from business operations; owner investment is a direct capital contribution.

Questions 36–50: Advanced Applications

36. Total Assets must always equal Total Liabilities. Answer: False Explanation: Total Assets = Total Liabilities + Owner’s Equity.

37. A business can have negative equity. Answer: True Explanation: This happens when liabilities exceed assets (insolvency situation).

38. The accounting equation is only useful at the end of the financial year. Answer: False Explanation: It applies after every transaction throughout the year.

39. Purchasing inventory on credit increases Assets and Equity. Answer: False Explanation: It increases Assets and Liabilities.

40. Depreciation does not involve cash outflow but still affects the accounting equation. Answer: True Explanation: It is a non-cash expense that reduces net assets and equity.

41. Owner’s Equity = Capital + Retained Earnings – Drawings. Answer: True Explanation: This is a common way to express equity in sole proprietorships and partnerships.

42. All liabilities are long-term obligations. Answer: False Explanation: Liabilities can be current (due within one year) or long-term.

43. If Assets increase by $50,000 and Liabilities increase by $30,000, Equity increases by $20,000. Answer: True Explanation: Change in Equity = Change in Assets – Change in Liabilities.

44. The Basic Accounting Equation ignores the time value of money. Answer: True Explanation: It is a fundamental identity and does not directly incorporate discounting or interest concepts.

45. Recording accrued revenue increases Assets and Liabilities. Answer: False Explanation: It increases Assets (receivable) and Owner’s Equity (revenue).

46. Withdrawals by the owner are considered business expenses. Answer: False Explanation: Withdrawals reduce equity directly and are not expenses.

47. The accounting equation supports the going concern assumption. Answer: True Explanation: It assumes the business will continue operating and classifying assets and liabilities accordingly.

48. Increasing one asset and decreasing another asset by the same amount keeps the equation balanced. Answer: True Explanation: Total assets, liabilities, and equity remain unchanged.

49. A balance sheet prepared from incorrect data can still make the accounting equation balance. Answer: True Explanation: The equation can balance even with errors if equal debits and credits are made (compensating errors).

50. Understanding the Basic Accounting Equation is essential for preparing all financial statements. Answer: True Explanation: It is the backbone of the Balance Sheet and indirectly supports the Income Statement and Statement of Owner’s Equity through effects on equity.