Understanding the Basic Accounting Equation

What is the basic accounting equation?

• ASSETS = EQUITY - LIABILITIES

• LIABILITIES = ASSETS + EQUITY

• ASSETS = LIABILITIES + EQUITY

• EQUITY = ASSETS - LIABILITIES

In a sole proprietorship, what is equity referred to as?

• Stockholder's Equity

• Owner's Equity

• Investor's Equity

• Partner's Equity

What happens when a business purchases equipment for cash?

• Liabilities increase and equity decreases

• Assets increase and liabilities increase

• Assets increase and equity decreases

• One asset increases and another asset decreases

If a business purchases supplies on account, what is affected?

• Assets increase and liabilities increase

• Assets decrease and equity decreases

• Liabilities decrease and equity increases

• Assets increase and equity decreases

What is the effect of making a payment to a creditor?

• Assets increase and liabilities increase

• Liabilities increase and equity decreases

• Assets decrease and liabilities decrease

• Assets increase and equity increases

What is the effect of making a payment in advance for rent?

• One asset increases and another asset decreases

• Assets decrease and equity decreases

• Assets increase and liabilities increase

• Liabilities decrease and equity increases

When a business sells services for cash, what happens?

• Liabilities increase and equity increases

• Assets decrease and liabilities decrease

• Assets increase and revenue increases

• Assets increase and equity decreases

What happens when services are sold on credit?

• Assets increase and revenue increases

• Assets decrease and liabilities decrease

• Liabilities increase and equity increases

• Assets increase and equity decreases

What is the effect of collecting accounts receivable?

• One asset increases and another asset decreases

• Assets decrease and equity decreases

• Assets increase and liabilities increase

• Liabilities decrease and equity increases

What happens when a business pays office salaries?

• Liabilities increase and equity decreases

• Assets decrease and expenses increase

• Assets increase and equity increases

• Assets increase and liabilities increase