Basic Accounting Quiz

What is the correct formula to calculate owner's equity based on assets and liabilities?

• Owner's Equity = Assets + Liabilities

• Owner's Equity = Assets - Liabilities

• Assets = Owner's Equity - Liabilities

• Liabilities = Owner's Equity + Assets

Answer explanation

Owner's equity represents the owner's claim after liabilities are subtracted from assets. Therefore, the correct formula is Owner's Equity = Assets - Liabilities.

Which of the following decreases the owner's equity?

• Revenue

• Expenses

• Investments

• Gains

Answer explanation

Expenses decrease the owner's equity because they represent costs incurred by the business. Unlike revenue, investments, and gains, which increase equity, expenses reduce the overall value of the owner's stake in the company.

If a company has total assets of ₱150,000.00 and total liabilities amounting to ₱50,000.00, what is the value of the owner's equity?

• ₱100,000.00

• ₱200,000.00

• ₱150,000.00

• ₱50,000.00

Answer explanation

Owner's equity is calculated as total assets minus total liabilities. Here, ₱150,000.00 (assets) - ₱50,000.00 (liabilities) equals ₱100,000.00. Therefore, the correct answer is ₱100,000.00.

If a business owner contributes ₱5,000.00 to the company, how does this affect the accounting equation?

• Increases liabilities

• Increases owner's equity

• Decreases assets

• No effect

Answer explanation

When a business owner contributes ₱5,000.00, it increases the owner's equity in the accounting equation. This is because the contribution adds to the net worth of the business, reflecting a higher equity position.

A company settles a ₱5,000.00 debt. What is the impact on its financial position regarding assets and liabilities?

• Assets increase, liabilities increase

• Assets decrease, liabilities decrease

• Assets decrease, liabilities remain the same

• Assets decrease, liabilities decrease

Answer explanation

Settling a ₱5,000.00 debt reduces both assets (cash outflow) and liabilities (debt paid off). Therefore, the correct impact on the financial position is that assets decrease and liabilities decrease.

Which of the following transactions does not affect the total assets or liabilities?

• Sale of inventory

• Payment of a loan

• Issuance of stock

• Payment of dividends

Answer explanation

Payment of dividends reduces retained earnings but does not change total assets or liabilities, as it involves transferring cash to shareholders without affecting the overall balance sheet.

Analyze the effect on the accounting equation when a company acquires inventory on credit.

• Decreases assets, increases liabilities

• Increases assets, decreases equity

• Increases assets, increases liabilities

• No effect

Answer explanation

When a company acquires inventory on credit, it increases its assets (inventory) and also increases its liabilities (accounts payable), thus the correct choice is 'Increases assets, increases liabilities'.

Provide an example of a transaction that affects only the asset side of the accounting equation.

• Equipment purchases for cash

• Owner investment

• Payment of rent

• Receipt of a loan

Answer explanation

The correct choice, 'Equipment purchases for cash', affects only the asset side by increasing equipment (an asset) and decreasing cash (also an asset), keeping the accounting equation balanced.

Which of the following represents a current asset?

• Long-term Debt

• Inventory

• Retained Earnings

• Service Revenue

Answer explanation

Inventory is a current asset as it is expected to be sold or used within a year. Long-term debt is a liability, retained earnings are equity, and service revenue is income, none of which are current assets.

Which type of account represents the owner's investment in the business?

• Capital

• Expenses

• Income

• Liabilities

Answer explanation

The 'Capital' account represents the owner's investment in the business, reflecting the funds contributed by the owner. Other options like Expenses, Income, and Liabilities do not represent ownership investment.