12 Lecture

1. What is the accounting equation? A. Assets = Liabilities + Equity B. Liabilities = Assets + Equity C. Equity = Assets - Liabilities D. None of the above

Answer: A

2. What is the relationship between assets and equity in the accounting equation? A. They are equal B. Equity is greater than assets C. Assets are greater than equity D. None of the above

Answer: A

3. Which of the following is an example of an asset? A. Accounts payable B. Inventory C. Retained earnings D. Common stock

Answer: B

4. Which of the following is an example of a liability? A. Accounts receivable B. Equipment C. Long-term debt D. Prepaid rent

Answer: C

5. What happens to equity when a company incurs a loss? A. Equity decreases B. Equity increases C. Equity remains the same D. It depends on the amount of the loss

Answer: A

6. Which of the following is an example of an owner's equity account? A. Accounts payable B. Common stock C. Rent expense D. Salaries payable

Answer: B

7. What happens to the accounting equation when a company borrows money from a bank? A. Assets increase and liabilities increase B. Assets increase and equity increases C. Liabilities increase and equity increases D. None of the above

Answer: A

8. What happens to the accounting equation when a company pays cash for an expense? A. Assets increase and liabilities increase B. Assets decrease and liabilities decrease C. Assets decrease and equity decreases D. None of the above

Answer: C

9. What is the purpose of the accounting equation? A. To ensure that accounting records remain in balance B. To calculate net income C. To determine the fair value of a company D. None of the above

Answer: A

10. Which of the following is an example of a contra account? A. Accounts payable B. Accumulated depreciation C. Rent expense D. Salaries payable

Answer: B

1. Define the accounting equation.

Answer: The accounting equation is a fundamental concept in accounting that represents the relationship between a company's assets, liabilities, and equity. The equation states that assets are equal to the sum of liabilities and equity.

2. What is the purpose of the accounting equation?

Answer: The purpose of the accounting equation is to ensure that accounting records remain in balance. It serves as the basis for double-entry bookkeeping and helps ensure the accuracy of financial statements.

3. What is an asset in the accounting equation?

Answer: An asset is anything of value that a company owns or controls. Examples of assets include cash, inventory, property, and equipment.

4. What is a liability in the accounting equation?

Answer: A liability is an obligation that a company owes to another party. Examples of liabilities include accounts payable, loans, and taxes owed.

5. What is equity in the accounting equation?

Answer: Equity represents the residual value of a company's assets after deducting liabilities. It includes owner's equity and retained earnings.

6. What is the relationship between assets and liabilities in the accounting equation?

Answer: Assets are equal to the sum of liabilities and equity. This means that a company's assets are financed by either its liabilities or its equity.

7. What happens to equity when a company generates a profit?

Answer: Equity increases when a company generates a profit because net income is added to retained earnings.

8. What happens to equity when a company distributes dividends?

Answer: Equity decreases when a company distributes dividends because it represents a distribution of profits to shareholders.

9. What is the significance of the accounting equation in financial analysis?

Answer: The accounting equation provides a snapshot of a company's financial position and is used in financial analysis to assess its solvency and liquidity.

10. How does the accounting equation help in detecting errors in financial statements?

Answer: The accounting equation helps in detecting errors in financial statements because it ensures that assets equal the sum of liabilities and equity. If the accounting equation is not balanced, there is an error in the financial statements that needs to be corrected.

The accounting equation is the foundation of double-entry accounting and represents the relationship between a company's assets, liabilities, and equity. It is expressed as: Assets = Liabilities + Equity This equation serves as a framework for recording financial transactions and ensures that accounting records remain in balance. In double-entry bookkeeping, every transaction affects at least two accounts, with one account debited and the other credited. Assets are resources that a company owns or controls, which can be used to generate future economic benefits. Examples of assets include cash, accounts receivable, inventory, property, plant, and equipment. Liabilities are obligations that a company owes to other parties and represent claims against the company's assets. Examples of liabilities include accounts payable, loans, and taxes owed. Equity represents the residual value of a company's assets after deducting liabilities. It includes owner's equity, which represents the investments made by the owner, and retained earnings, which represent profits that have been reinvested in the company. The accounting equation provides a snapshot of a company's financial position and is used in financial analysis to assess its solvency and liquidity. For example, if a company's liabilities are greater than its assets, it may have difficulty meeting its obligations and may be at risk of insolvency. The accounting equation also helps in detecting errors in financial statements because it ensures that assets equal the sum of liabilities and equity. If the accounting equation is not balanced, there is an error in the financial statements that needs to be corrected.