Accounting Equation Flashcards

1
Q

The basic accounting equation is: ________ = ________ + ________

  1. Assets = Liabilities + Equity
  2. Equity = Assets + Liabilities
A
  1. Assets = Liabilities + Equity
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2
Q

Assets are the stuff that a business owes.

True or False?

A

False.

Assets are stuff that a business owns.

In accounting speak: “Assets are probable future economic benefits obtained or controlled by a particular entity as the result of past transactions or events.”

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3
Q

Liabilities are the stuff that a business owns.

True or False?

A

False.

Liabilities are the stuff that a business owes to third parties. A more wordy definition is:

“Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”

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4
Q

Equity is the owner’s claim on the net assets of a business.

True or False?

A

True.

Indeed this is true. Equity is the stuff that a business owes to its owners.

You could also say: “Equity represents the net funds invested into a business by it’s owners.” or “Equity is the residual value of an entity’s assets after deducting all of it’s liabilities.”

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5
Q

The balance sheet gives us a snapshot of a business’s assets, liabilities equity at a point in time?

True or False?

A
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6
Q

What are the two main components of equity?

Capital contributions
Revenue
Expenses
Retained Earnings

A
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7
Q

What are retained earnings?

  1. Net profit
  2. Accumulated profits held for future use
A
  1. Accumulated profits held for future use

Retained earnings are the profits a business has held onto since it was born. It excludes any withdrawals distributed back to the owners.

Retained earnings = accumulated profits - withdrawals

Depending on the business structure, withdrawals are also called drawings or dividends.

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8
Q

Can a business have negative retained earnings?

Yes or No

A
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9
Q

The income statement flows into the accounting equation through ________.

  1. Assets
  2. Liabilities
  3. Equity
A
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10
Q

When a customer buys a product “on account”, they agree to pay the supplier at _______ date.

  1. an earlier
  2. a later
A
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11
Q

An owner makes a $1,000 initial investment into their business. What is the impact on the accounting equation?

  1. Assets and equity go up
  2. Assets and liabilities go up
A
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12
Q

A business borrows $5,000 from the bank. What is the impact on the accounting equation?

  1. Assets and equity go up
  2. Assets and liabilities go up
A
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13
Q

An owner withdraws $500 cash from their business for personal use. What is the impact on the accounting equation?

  1. Assets go up and equity goes down
  2. Assets and equity go down
A
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14
Q

A business buys a car for $10,000. The payment is made in cash. Is the car an asset or a liability?

  1. Asset
  2. Liability
  3. Both
A
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15
Q

A business finances a new vehicle with a bank. Does the business record an asset or a liability?

  1. Asset
  2. Liability
  3. Both
A
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16
Q

A business has liabilities of $25,000 and equity of $5,000. How many assets does it have?

  1. $30,000
  2. $20,000
A
17
Q

A business has assets of $90,000 and liabilities of $50,000. How much equity does it have?

  1. $140,000
  2. $40,000
A
18
Q

A business takes out a loan to buy a machine. What is the effect on the accounting equation?

  1. Assets and liabilities go up
  2. Assets and equity go down
A
19
Q

A business collects cash from a customer. The balance was initially recorded in accounts receivable. What is the impact on equity?

  1. Increases
  2. Decreases
  3. No impact
A
20
Q

A business pays out cash to a supplier. The balance was initially recorded in accounts payable. What is the impact on liabilities?

  1. Increases
  2. Decreases
  3. No impact
A
21
Q

A business makes a net profit during a financial year. What impact does this have on equity?

  1. Increases
  2. Decreases
  3. No impact
A
22
Q

A business makes a net loss during a financial year. What impact does this have on equity?

  1. Increases
  2. Decreases
  3. No impact
A
23
Q

At the end of a financial year, a business has a total assets of $150,000 and total equity of $70,000. What were the business’s total liabilities?

  1. $220,000
  2. $80,000
A
24
Q

A business sells a product “on account” and earns a profit. What is the impact on the accounting equation?

  1. Assets and equity go up
  2. Assets and liabilities go up
A
25
Q

A business receives a payment from a customer in advance for a service. The service is to be carried out in the future. What is the impact on the accounting equation?

  1. Assets and equity go up
  2. Assets and liabilities go up
A
  1. Assets and liabilities go up

Cash increases because the business has received a payment. Cash is a type of asset so total assets also goes up.

Deferred Revenue also increases. This is because the business has received an advance payment for a service that hasn’t yet been provided. Deferred Revenue is a liability account. So total liabilities also go up.

The journal entry is:
Dr Cash
Cr Deferred Revenue