Accounting Equation Practice Quiz
Accounting Equation: 20 Questions for Beginners
How well do you really know the Accounting Equation? Let’s put your knowledge to the test!
In this video, we’ll test your understanding of the Accounting Equation with 20 multiple choice questions.
Can you answer these twenty multiple choice questions on the Accounting Equation? Grab a pen, play along and remember to drop your score in the comments when you finish.
What is the basic Accounting Equation?
a) Assets + Equity = Liabilities
b) Assets = Equity – Liabilities
c) Assets = Liabilities + Equity
d) Liabilities = Assets + Equity
If Assets do not equal Liabilities + Equity, what does this indicate?
a) There is an error in the accounting records
b) The business is making a loss
c) The business has negative equity
d) The equation does not apply to this business
Which of the following is classified as an Asset?
a) Accrued Expenses
b) Loans Payable
c) Retained Earnings
d) Inventory
Which of the following is classified as a Liability?
a) Accounts Receivable
b) Accounts Payable
c) Share Capital
d) Equipment
Which of the following is included in Equity?
a) Interest Payable
b) Prepaid Expenses
c) Retained Earnings
d) Cash
Which Financial Statement reflects the Accounting Equation at a point in time?
a) Income Statement
b) Cash Flow Statement
c) Statement of Owner’s Equity
d) Balance Sheet
A business has $20,000 in Liabilities and $50,000 in Equity. What are its Assets?
a) $70,000
b) $30,000
c) $20,000
d) $10,000
A business has $50,000 in Assets and $20,000 in Liabilities. What is its Equity?
a) $70,000
b) $30,000
c) $20,000
d) $10,000
The Income Statement is linked to the Accounting Equation through ____. Can you fill in the blank?
a) Assets
b) Liabilities
c) Equity
d) Dividends
Which of the following is not classified as a Liability?
a) Prepaid Expenses
b) Accounts Payable
c) Bank Loan
d) Unearned Revenue
Which of the following is not classified as an Asset?
a) Accounts Receivable
b) Inventory
c) Equipment
d) Accounts Payable
Which of the following is not included in Equity?
a) Share Capital
b) Accrued Revenue
c) Retained Earnings
d) Common Stock
An owner contributes cash into their business. How does this affect the Accounting Equation?
a) Assets increase & Equity increases
b) Assets increase & Liabilities increase
c) Assets decrease & Equity decreases
d) Assets increase & Liabilities decrease
An owner withdraws cash from their business for personal use. How does this affect the Accounting Equation?
a) Assets increase & Equity increases
b) Assets decrease & Liabilities increase
c) Assets decrease & Equity decreases
d) Assets increase & Liabilities decrease
A business issues a $1,500 cash payment to settle an Account Payable. How does this affect the Accounting Equation?
a) Assets increase & Liabilities increase
b) Assets decrease & Equity decreases
c) Assets decrease & Liabilities increase
d) Assets decrease & Liabilities decrease
A business buys equipment worth $3,000 on account. How does this affect the Accounting Equation?
a) Assets increase & Equity increases
b) Assets increase & Liabilities increase
c) Assets decrease & Liabilities decrease
d) Assets increase & Liabilities decrease
Which of the following transactions would increase Total Equity?
a) A business earns $5,000 in revenue
b) A business pays $1,000 in expenses
c) An owner withdraws $2,000 cash for personal use
d) A business borrows $3,000 from a bank
A business has Total Assets of $80,000 and Total Liabilities of $110,000. What is its Total Equity?
a) $30,000
b) $110,000
c) -$30,000
d) $190,000
Which of the following sets of figures does not balance under the Accounting Equation?
a) $80,000 in Assets, $30,000 in Liabilities & $50,000 in Equity
b) $50,000 in Assets, $20,000 in Liabilities & $25,000 in Equity
c) $90,000 in Assets, $40,000 in Liabilities & $50,000 in Equity
d) $120,000 in Assets, $70,000 in Liabilities & $50,000 in Equity
A business sells goods for $1,000 cash that originally cost $700. How does this affect the Accounting Equation?
a) Assets increase by $1,000 & Equity increases by $1,000
b) Assets increase by $300 & Liabilities increase by $300
c) Assets increase by $700 & Equity increases by $700
d) Assets increase by $300 & Equity increases by $300
Bonus Question! Which of the following is a component of the Expanded Accounting Equation?
a) Inventory
b) Accounts Payable
c) Dividends
d) Notes Receivable
Scroll down to see the answers.
Free Accounting Equation Cheat Sheet
You can download my Free Accounting Equation Cheat Sheet here. It summarizes all the most important information you need to remember.
Accounting Equation Practice Answers
Here are the answers:
c) Assets = Liabilities + Equity. This formula is the foundation of the Double-Entry Accounting System.
a) There is an error in the accounting records. The Accounting Equation always has to balance. So if Assets don't equal Liabilities plus Equity, then something has been recorded incorrectly.
d) Inventory is an Asset because it’s a resource that a business owns and expects to sell for future economic benefit.
b) Accounts Payable is a Liability because it represents money that a business owes to suppliers. This means it has an obligation to pay them in the future.
c) Retained Earnings represent accumulated profits kept in the business.
d) The Balance Sheet is structured directly on the Accounting Equation. It gives a snapshot of a business's Assets, Liabilities & Equity at a specific point in time.
a) $70,000. According to the Accounting Equation, Assets = Liabilities + Equity. If we add $20,000 in Liabilities to $50,000 in Equity then we get $70,000 in Assets.
b) $30,000. If we rearrange the Accounting Equation then we get: Equity = Assets – Liabilities, or Net Assets. $50,000 in Assets – $20,000 in Liabilities is $30,000 in Equity.
c) Equity. The Income Statement shows a business's revenues and expenses, which are used to calculate Net Profit. Net Profit increases Retained Earnings which is a component of Equity.
a) Prepaid Expenses are in fact a type of Asset. They represent payments made in advance for goods or services to be received in the future.
d) Accounts Payable is a type of Liability. It represents what a business owes to suppliers.
b) Accrued Revenue (or Unbilled Revenue) is an Asset. It represents income that has been earned, but not yet received or recorded.
a) Assets increase & Equity increases. The business’s Cash goes up, so it's Assets increase. And its Equity increases because the owner’s claim on the business grows.
c) Assets decrease & Equity decreases. When the owner takes out cash, their Assets decrease. And Equity decreases, because the owner’s claim on the business's Net Assets is reduced.
d) Assets decrease & Liabilities decrease. Paying off an Account Payable reduces cash - which is an asset - by $1,500 and also reduces the outstanding liability by $1,500.
b) Assets increase & Liabilities increase. The business acquires equipment worth $3,000, so fixed assets go up. And since the purchase was made on account, a new Account Payable of $3,000 is created. Which is of course a Liability.
a) A business earns $5,000 in revenue. Revenue increases Net Profit, and Net Profit flows into Retained Earnings, which is part of Equity.
-$30,000. We know that Equity is equal to Net Assets. If we take $80,000 in Assets and minus $110,000 in Liabilities then we get $30,000 in Negative Equity. This means the business owes more to external parties than it owns — a financially risky position.
b) $50,000 in Assets, $20,000 in Liabilities & $25,000 in Equity. $20,000 in Liabilities plus $25,000 in Equity is $45,000 which doesn't match the $50,000 in Assets.
d) Assets increase by $300 & Equity increases by $300. The sale increases Cash by $1,000, but at the same time it reduces Inventory by $700. The net effect is a $300 increase in Assets.
c) Dividends. In the Expanded Accounting Equation, Equity is broken into its components like Capital Contributions, Revenue, Expenses and Dividends.
Did you manage to get them all right? Let us know in the comments below.
Accounting Equation Video Tutorial
If you’d like to learn more about the Accounting Equation then give this video a watch:
In this video, I attempt to explain how the basic Accounting Equation works in less than two minutes.
Expanded Accounting Equation Video Tutorial
For a deeper dive into the Expanded Accounting Equation, try this video:
In this tutorial, I break down the Expanded Accounting Equation.