Accounting Equation
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If you have any difficulty answering the questions, learn more about this topic by reading our mini-lectures covering introductory to Accounting Equation.
| 1. | The basic accounting equation is Assets = Liabilities + _____________. |
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 | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 3. | The owner withdraws business assets for personal use. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 4. | The company receives cash from a bank loan. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 5. | The company repays the bank that had lent money to the company. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 6. | The company purchases equipment with its cash. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 7. | The owner contributes her personal truck to the business. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 8. | The company purchases a significant amount of supplies on credit. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 9. | The company purchases land by paying half in cash and signing a note payable for the other half. | |||
| Assets: | Increase | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
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 | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 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 | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 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 | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 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 | Decrease | No Effect | |
| Liabilities: | Increase | Decrease | No Effect | |
| Owner's (or Stockholders') Equity: | Increase | Decrease | No Effect | |
| 14. | Which of the following will cause owner's equity to increase? |
| expenses owner draws revenues | |
| 15. | Which of the following will cause owner's equity to decrease? |
| net income net loss revenues | |
| 16. | The accounting equation should remain in balance because every transaction affects how many accounts? |
| only one only two two or more | |
| 17. | A corporation's net income is eventually recorded in the following stockholders' equity account: _______________. |
| 18. | A corporation's quarterly _______________ 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 _______________. |
| 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 _______________. |
If you have any difficulty answering the questions, learn more about this topic by reading our mini-lectures covering introductory to Accounting Equation.
