Chapt 2 Acc Equation Flashcards
What is the accounting equation?
Assets = Liabilities + Equity
Which side of the accounting equation represents what the company owns?
Assets
Which side of the accounting equation represents what the company owes?
Liabilities
What is equity in the accounting equation?
Equity represents the owner’s claim on the company’s assets after all liabilities are paid off.
In the accounting equation, what happens if assets increase?
Equity increases.
In the accounting equation, what happens if liabilities increase?
Equity decreases.
True or False: The accounting equation must always balance.
True
If total assets are $100,000 and total liabilities are $40,000, what is equity?
$60,000
If equity is $50,000 and liabilities are $20,000, what are the total assets?
$70,000
What is the fundamental principle behind the accounting equation?
The fundamental principle is that a company’s resources must be financed by either debt or equity.
What are examples of assets in the accounting equation?
Cash, accounts receivable, inventory, equipment, buildings, land, investments, etc.
What are examples of liabilities in the accounting equation?
Accounts payable, loans payable, wages payable, bonds payable, etc.
What are examples of equity in the accounting equation?
Common stock, retained earnings, additional paid-in capital, etc.
What is the formula to calculate equity in the accounting equation?
Equity = Assets - Liabilities
How does the accounting equation relate to the balance sheet?
The accounting equation is the foundation of the balance sheet, as it shows the relationship between a company’s assets, liabilities, and equity.
What is the purpose of the accounting equation?
The purpose is to provide a clear picture of a company’s financial position by ensuring that total assets are always equal to the sum of liabilities and equity.
What is the significance of the accounting equation for financial decision-making?
It helps stakeholders understand how a company’s resources are financed and how changes in assets, liabilities, and equity impact the overall financial health of the business.
What is the role of the accounting equation in double-entry accounting?
The accounting equation is the basis for double-entry accounting, where every transaction affects at least two accounts to maintain the equation’s balance.
What happens if the accounting equation does not balance?
If the equation does not balance, it indicates an error in the financial records that needs to be identified and corrected.
How does the accounting equation help in financial analysis?
By examining changes in assets, liabilities, and equity, analysts can assess a company’s financial performance, stability, and leverage ratios.
What are the limitations of the accounting equation?
It does not account for the time value of money, market fluctuations, or intangible assets that may impact a company’s true financial position.
How does the accounting equation impact financial reporting?
The equation ensures that financial statements accurately reflect a company’s financial position, performance, and cash flows to provide relevant information to investors and stakeholders.
What are the key assumptions underlying the accounting equation?
The key assumptions are that assets are acquired through debt or equity financing, and that the company operates as a separate entity from its owners.
What role does the accounting equation play in budgeting and forecasting?
It helps in setting financial goals, allocating resources, and predicting future financial outcomes based on expected changes in assets, liabilities, and equity.
