Accounting Equation (Practice Quiz)

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

    Net assets (if a nonprofit organization).
    .

  2. 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.

  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 6. The company purchases equipment with its cash.
    Assets
    Increase
    Right!
    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
    Right!
    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
    Right!
    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.
  8. 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.
  9. 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.
  10. 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.

  11. 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.

  12. 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.
  13. 11. In June, Company X receives the $5,000. What is the effect on the accounting equation and which accounts are affected at Company X?
    Assets
    Increase
    Right!
    The asset Cash will increase. However, the asset Accounts Receivable will decrease. Therefore, the total amount of assets will not change.
    Decrease
    Right!
    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.
  14. 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.
  15. 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.
  16. 14.

    Which of the following will cause owner's equity to increase?

    Expenses
    Wrong.
    Expenses will cause owner's equity to decrease.
    Owner Draws
    Wrong.
    Owner's draws will cause owner's equity to decrease.
    Revenues
    Right!
    Revenues will cause owner's equity to increase
  17. 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.
  18. 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.
  19. 17. A corporation's net income is eventually recorded in the following stockholders' equity account:
    __________
    Retained Earnings
    .
  20. 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.
  21. 19. The financial statement with a structure that is similar to the accounting equation is the
    __________
    balance sheet
    .
  22. 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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