Accounting Equation Flashcards
The basic accounting equation is: ________ = ________ + ________
- Assets = Liabilities + Equity
- Equity = Assets + Liabilities
- Assets = Liabilities + Equity
Assets are the stuff that a business owes.
True or False?
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.”
Liabilities are the stuff that a business owns.
True or False?
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.”
Equity is the owner’s claim on the net assets of a business.
True or False?
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.”
The balance sheet gives us a snapshot of a business’s assets, liabilities equity at a point in time?
True or False?
What are the two main components of equity?
Capital contributions
Revenue
Expenses
Retained Earnings
What are retained earnings?
- Net profit
- Accumulated profits held for future use
- 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.
Can a business have negative retained earnings?
Yes or No
The income statement flows into the accounting equation through ________.
- Assets
- Liabilities
- Equity
When a customer buys a product “on account”, they agree to pay the supplier at _______ date.
- an earlier
- a later
An owner makes a $1,000 initial investment into their business. What is the impact on the accounting equation?
- Assets and equity go up
- Assets and liabilities go up
A business borrows $5,000 from the bank. What is the impact on the accounting equation?
- Assets and equity go up
- Assets and liabilities go up
An owner withdraws $500 cash from their business for personal use. What is the impact on the accounting equation?
- Assets go up and equity goes down
- Assets and equity go down
A business buys a car for $10,000. The payment is made in cash. Is the car an asset or a liability?
- Asset
- Liability
- Both
A business finances a new vehicle with a bank. Does the business record an asset or a liability?
- Asset
- Liability
- Both