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Accounting Equation (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Accounting Equation (Explanation).


1.
The basic accounting equation is Assets = Liabilities + __________ Owner's Equity or Stockholders' Equity (if a corporation).

Net assets (if a nonprofit organization)..

For each of the transactions in items 2 through 13, indicate the two (or more) effects on the accounting equation of the business or company.

2.
The owner invests personal cash in the business.
Assets
Increase
Right!
The company's asset account Cash increases.
Decrease
Wrong.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction.
Decrease
Wrong.
Liabilities are not involved in this transaction.
No Effect
Right!
Liabilities are not involved in this transaction.
Owner's (or Stockholders') Equity
Increase
Right!
The proprietor's Capital account increases. (If the company is a corporation, then the Common Stock account(s) will increase.)
Decrease
Wrong.
No Effect
Wrong.
3.
The owner withdraws cash from the business for personal use.
Assets
Increase
Wrong.
Decrease
Right!
The company's asset account Cash will decrease.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction.
Decrease
Wrong.
Liabilities are not involved in this transaction.
No Effect
Right!
Liabilities are not involved in this transaction.
Owner's (or Stockholders') Equity
Increase
Wrong.
Decrease
Right!
The proprietorship's owner's equity decreases by an entry to the Drawing account. If the company is a corporation, Stockholders' Equity will decrease by an entry to Retained Earnings or to Dividends.
No Effect
Wrong.
4.
The company receives cash from a bank loan.
Assets
Increase
Right!
The company's asset account Cash increases.
Decrease
Wrong.
No Effect
Wrong.
Liabilities
Increase
Right!
The company's liabilities (such as Notes Payable or Loans Payable) have increased.
Decrease
Wrong.
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.
5.
The company repays the bank that had lent money to the company.
Assets
Increase
Wrong.
Decrease
Right!
The company's asset account Cash decreased.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Decrease
Right!
The company's liabilities (such as Notes Payable or Loans Payable) have decreased
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.
6.
The company purchases equipment with its cash.
Assets
Increase
The asset Equipment will increase. However, the asset Cash will decrease by the same amount. Therefore, the total amount of assets will not change.
Decrease
The asset Cash will decrease. However, the asset Equipment will increase by the same amount. Therefore, the total amount of assets will not change.
No Effect
There is no effect on the total amount of assets. However, the asset Equipment increased by the same amount that the asset Cash decreased.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction.
Decrease
Wrong.
Liabilities are not involved in this transaction.
No Effect
Right!
Liabilities are not involved in this transaction.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.
7.
The owner contributes his/her personal truck to the business.
Assets
Increase
Right!
An asset such as Trucks increased.
Decrease
Wrong.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction.
Decrease
Wrong.
Liabilities are not involved in this transaction.
No Effect
Right!
Liabilities are not involved in this transaction.
Owner's (or Stockholders') Equity
Increase
Right!
The proprietor's Capital account increased. (If the company is a corporation, then the Common Stock account(s) would increase.)
Decrease
Wrong.
No Effect
Wrong.
8.
The company purchases a significant amount of supplies on credit.
Assets
Increase
Right!
The company's asset account Supplies increases.
Decrease
Wrong.
No Effect
Wrong.
Liabilities
Increase
Right!
The company's liability account Accounts Payable increases.
Decrease
Wrong.
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction. Owner's (Stockholders') Equity will be reduced when the supplies are used.
9.
The company purchases land by paying half in cash and signing a note payable for the other half.
Assets
Increase
Right!
The asset Land has increased. (Two other accounts are also involved.)
Decrease
Right!
The asset Cash has decreased. (Two other accounts are also involved.)
No Effect
Wrong.
The balances of two asset accounts have changed.
Liabilities
Increase
Right!
Liabilities (Notes Payable account) have increased.
Decrease
Wrong.
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.

Information for Items 10 through 13
Company X provides consulting services to Client Q in May. Company X bills Client Q in May for the agreed upon amount of $5,000. The sales invoice shows that the amount will be due in June.

10.
In May, Company X records the transaction by a debit to Accounts Receivable for $5,000 and a credit to Service Revenues for $5,000. What is the effect of this entry upon the accounting equation for Company X?
Assets
Increase
Right!
The asset Accounts Receivable increased.
Decrease
Wrong.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction.
Decrease
Wrong.
Liabilities are not involved in this transaction.
No Effect
Right!
Liabilities are not involved in this transaction.
Owner's (or Stockholders') Equity
Increase
Right!
Revenues cause Owner's (Stockholders') Equity to increase. (In a proprietorship the owner's Capital account will increase. In a corporation the Retained Earnings account will increase.)
Decrease
Wrong.
No Effect
Wrong.
11.
In June, Company X receives the $5,000. What is the net effect on the accounting equation totals and which accounts are affected at Company X?
Assets
Increase
Wrong.
The asset Cash will increase. However, the asset Accounts Receivable will decrease. Therefore, the total amount of assets will not change.
Decrease
Wrong.
The asset Accounts Receivable will decrease. However, the asset Cash will increase. Therefore, the total amount of assets will not change.
No Effect
Right!
There is no effect on the total amount of assets. However, the asset Cash increased by the same amount that the asset Accounts Receivable decreased.
Liabilities
Increase
Wrong.
Liabilities are not involved in this transaction
Decrease
Wrong.
Liabilities are not involved in this transaction
No Effect
Right!
Liabilities are not involved in this transaction
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.
12.
What is the effect on Client Q's accounting equation in May when Client Q records the transaction as a debit to Consultant Expense for $5,000 and a credit to Accounts Payable for $5,000?
Assets
Increase
Wrong.
Assets are not involved in this transaction.
Decrease
Wrong.
Assets are not involved in this transaction.
No Effect
Right!
Assets are not involved in this transaction.
Liabilities
Increase
Right!
Liabilities increase because Accounts Payable is a liability.
Decrease
Wrong.
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Decrease
Right!
An expense will cause Owner's (Stockholders') Equity to decrease.
No Effect
Wrong.
13.
What is the effect on Client Q's accounting equation in June when Client Q remits the $5,000? Also, which accounts will be involved?
Assets
Increase
Wrong.
Decrease
Right!
The asset Cash will decrease.
No Effect
Wrong.
Liabilities
Increase
Wrong.
Decrease
Right!
Liabilities will decrease, since Accounts Payable is a liability.
No Effect
Wrong.
Owner's (or Stockholders') Equity
Increase
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
Decrease
Wrong.
Owner's (Stockholders') Equity is not involved in this transaction.
No Effect
Right!
Owner's (Stockholders') Equity is not involved in this transaction.
14.
Which of the following will cause owner's equity to increase?

Expenses

Wrong.
Expenses will cause owner's equity to decrease.

Owner's Draws

Wrong.
Owner's draws will cause owner's equity to decrease.

Revenues

Right!
Revenues will cause owner's equity to increase
15.
Which of the following will cause owner's equity to decrease?

Net Income

Wrong.
Net income will cause owner's equity to increase

Net Loss

Right!
A net loss will cause owner's equity to decrease.

Revenues

Wrong.
Revenues will cause owner's equity to increase.
16.
The accounting equation should remain in balance because every transaction affects how many accounts?

Only One

Wrong.

Only Two

Not the best answer.

Two Or More

Right!
Every transaction will affect two or more accounts.
17.
A corporation's net income is eventually recorded in the following stockholders' equity account: __________ Retained Earnings.
18.
A corporation's quarterly __________ dividends will cause a reduction in the corporation's retained earnings, which in turn reduces the corporation's stockholders' equity. However, this will not reduce the corporation's net income.
19.
The financial statement with a structure that is similar to the accounting equation is the __________ balance sheet.
20.
The financial statement that reports the portion of change in owner's equity resulting from revenues and expenses during a specified time interval is the __________ income statement.
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worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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