Accounting Equation Flashcards
What is the accounting equation for a sole proprietorship?
Assets = Liabilities + Owner’s Equity
What is the accounting equation for a corporation?
Assets = Liabilities + Stockholders’ Equity
Define assets in the context of the accounting equation.
Resources that a company owns, such as cash, inventory, and equipment.
Define liabilities in the context of the accounting equation.
Obligations or amounts that a company owes to others.
What is owner’s equity?
The amount remaining after liabilities are deducted from assets.
How is owner’s equity calculated?
Assets - Liabilities = Owner’s (or Stockholders’) Equity
What is the purpose of the double-entry accounting system?
To ensure that every business transaction affects at least two accounts, maintaining balance in the accounting equation.
What does the balance sheet report?
A company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time.
What does the income statement report?
A company’s revenues and expenses, resulting in net income over a period of time.
True or False: The accounting equation must always remain in balance.
True
Fill in the blank: Withdrawals of company assets by the owner for personal use are known as _______.
draws
What happens when a company borrows money from a bank?
Assets increase and liabilities increase by the same amount.
What is the effect of purchasing equipment for cash on the accounting equation?
One asset increases and another asset decreases, resulting in no effect on total assets.
How does an expense affect the accounting equation?
It decreases assets and decreases owner’s equity.
What is the effect on the accounting equation when the owner invests personal funds into the business?
Assets increase and owner’s equity increases by the same amount.
List examples of assets.
- Cash
- Accounts Receivable
- Inventory
- Prepaid Insurance
- Investments
- Land
- Buildings
- Equipment
- Goodwill
List examples of liabilities.
- Notes Payable
- Accounts Payable
- Salaries and Wages Payable
- Interest Payable
- Income Taxes Payable
What is the effect of an owner’s drawing on the accounting equation?
Assets decrease and owner’s equity decreases.
What accounts are involved when a company records an owner’s investment?
- Cash
- J. Ott, Capital
What accounts are involved when a company records an owner’s drawing?
- Cash
- J. Ott, Drawing
What is the accounting equation?
Assets = Liabilities + Owner’s Equity
What happens to assets when ASC pays $600?
Assets decrease by $600
How does an expense affect owner’s equity?
Owner’s equity decreases
What is recorded in the expense account when ASC incurs an expense?
Advertising Expense