The Accounting Equation
Overview
Behind every set of accounts, no matter how large the business, sits one beautifully simple idea: whatever a business owns must have come from somewhere. The accounting equation captures that idea in a single line, Assets = Capital + Liabilities, and it never stops being true. Master it and the whole of double entry book-keeping suddenly has a logic you can lean on.
In this lesson you will learn exactly what assets, liabilities and owner's equity (capital) mean, see why the two sides of the equation always balance, and practise rearranging it to find any missing element. You will also watch the equation stay balanced through a series of real transactions, which is the perfect warm-up for the statement of financial position that follows.
Objectives
- assets, liabilities and owner’s equity.
- the accounting equation.
- how to apply the accounting equation.
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on The Accounting Equation. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which of the following is the correct accounting equation? A. Assets = Capital - Liabilities B. Assets = Capital + Liabilities C. Capital = Assets + Liabilities D. Liabilities = Assets + Capital Answer: B
- A business has assets of $50,000 and liabilities of $18,000. What is the capital? A. $32,000 B. $68,000 C. $18,000 D. $50,000 Answer: A
- A trader has capital of $40,000 and liabilities of $15,000. What are the total assets? A. $25,000 B. $40,000 C. $55,000 D. $15,000 Answer: C
- Which of these is a liability? A. Money in the business bank account B. Premises owned by the business C. Amount owed to a credit supplier D. Inventory held for resale Answer: C
- A business buys a vehicle on credit. What is the effect on the accounting equation? A. Assets and capital both increase B. Assets and liabilities both increase C. Assets increase and liabilities decrease D. There is no effect Answer: B
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Recommended Books
Practice Mock Questions
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