Financial Accounting Quiz: Accounting Equation
20 questions · exam conditions
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Accounting EquationQuestion 1 of 20

A business owner starts a company by investing ($50,000) cash. The company then performs the following transactions:

  • Buys ($5,000) of supplies on account.
  • Performs services for ($15,000) in cash.
  • Pays ($2,000) for the current month's rent.
  • The owner withdraws ($3,000) cash for personal use.

What is the net change in total equity resulting from this series of events?

An increase of ($10,000)
An increase of ($60,000)
An increase of ($62,000)
An increase of ($50,000)
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Financial Accounting Quiz

Financial Accounting Quiz: Accounting Equation

Practice Accounting Equation in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Accounting Equation, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A business owner starts a company by investing ($50,000) cash. The company then performs the following transactions:

  • Buys ($5,000) of supplies on account.
  • Performs services for ($15,000) in cash.
  • Pays ($2,000) for the current month's rent.
  • The owner withdraws ($3,000) cash for personal use.

What is the net change in total equity resulting from this series of events?

  1. An increase of ($10,000)
  2. An increase of ($60,000) (correct answer)
  3. An increase of ($62,000)
  4. An increase of ($50,000)
Explanation: We need to analyze the effect of each transaction on equity:
  • Owner investment: Increases equity by ($50,000).
  • Buy supplies on account: No effect on equity (Assets increase, Liabilities increase).
  • Perform services: Increases equity (Revenue) by ($15,000).
  • Pay rent: Decreases equity (Expense) by ($2,000).
  • Owner withdrawal: Decreases equity by ($3,000).
Net change in equity = (50,000 + \15,000 - $2,000 - $3,000 = $60,000).

Question 2

A sole proprietorship begins the year with owner's equity of ($75,000). During the year, the business earns a net income of ($40,000). The owner invests an additional ($10,000) cash into the business and withdraws ($18,000) for personal use. What is the balance of owner's equity at the end of the year?

  1. ($87,000)
  2. ($97,000)
  3. ($107,000) (correct answer)
  4. ($143,000)
Explanation: The ending balance of owner's equity is calculated by taking the beginning balance and adjusting for all transactions that affect equity during the period.
  • Beginning Equity: ($75,000)
  • Add: Net Income: +($40,000)
  • Add: Additional Investment: +($10,000)
  • Subtract: Owner's Withdrawals: -($18,000)
Ending Equity = (75,000 + \40,000 + $10,000 - $18,000 = $107,000).

Question 3

If a company's total assets increased by ($120,000) during a year and its total equity increased by ($45,000) during the same year, which of the following statements about the company's liabilities is correct?

  1. Liabilities increased by ($75,000). (correct answer)
  2. Liabilities decreased by ($75,000).
  3. Liabilities increased by ($165,000).
  4. Liabilities decreased by ($165,000).
Explanation: The change in assets must equal the sum of the changes in liabilities and equity: ΔAssets=ΔLiabilities+ΔEquity\Delta\text{Assets} = \Delta\text{Liabilities} + \Delta\text{Equity}. We can rearrange this equation to solve for the change in liabilities:
  • ΔLiabilities=ΔAssets−ΔEquity\Delta\text{Liabilities} = \Delta\text{Assets} - \Delta\text{Equity}
  • \Delta\text{Liabilities} = \120,000 - $45,000 = $75,000$
A positive result indicates an increase, so liabilities increased by ($75,000).

Question 4

A company receives ($6,000) cash from a customer for services that will be provided next month. What is the immediate effect of this transaction on the accounting equation?

  1. Assets increase and equity increases.
  2. Assets increase and liabilities increase. (correct answer)
  3. Assets decrease and liabilities decrease.
  4. There is no net change in total assets, liabilities, or equity.
Explanation: When a company receives cash for services it has not yet provided, it incurs an obligation to provide those services in the future. This obligation is a liability called Unearned Revenue. The transaction increases assets (Cash) by ($6,000) and increases liabilities (Unearned Revenue) by ($6,000). Equity is not affected at this point because the revenue has not been earned yet.

Question 5

Phoenix Corporation's accounting records show the following account balances: Cash $45,000, Accounts Receivable $85,000, Equipment $120,000, Accumulated Depreciation $30,000, Accounts Payable $55,000, Notes Payable $80,000, and Retained Earnings $65,000. What is the balance in the Common Stock account?

  1. $20,000 (correct answer)
  2. $50,000
  3. $85,000
  4. $35,000
Explanation: First calculate total assets: Cash $45,000 + A/R $85,000 + Equipment $120,000 - Accumulated Depreciation $30,000 = $220,000. Total liabilities: A/P $55,000 + Notes Payable $80,000 = $135,000. Using A = L + E: $220,000 = $135,000 + Total Equity. Total Equity = $85,000. Since Total Equity = Common Stock + Retained Earnings, and Retained Earnings = $65,000, then Common Stock = $85,000 - $65,000 = $20,000. Choice B incorrectly ignores accumulated depreciation. Choice C uses total equity as the common stock balance. Choice D incorrectly subtracts accounts payable from retained earnings.

Question 6

At the start of the year, a company had assets of ($250,000) and liabilities of ($100,000). During the year, total assets increased to ($310,000) and total liabilities decreased to ($80,000). The company paid ($15,000) in dividends and did not issue any stock. What were the company's total revenues for the year, assuming total expenses were ($50,000)?

  1. ($65,000)
  2. ($80,000)
  3. ($115,000)
  4. ($145,000) (correct answer)
Explanation: First, determine the change in equity:
  • Beginning Equity = Beg. Assets - Beg. Liabilities = (250,000 - \100,000 = $150,000)
  • Ending Equity = End. Assets - End. Liabilities = (310,000 - \80,000 = $230,000)
  • Change in Equity = (230,000 - \150,000 = $80,000)
Next, use the relationship between the change in equity, net income, and dividends:
  • ΔEquity=Net Income−Dividends\Delta\text{Equity} = \text{Net Income} - \text{Dividends} (since no stock was issued)
  • (80,000 = \text{Net Income} - \15,000)
  • \text{Net Income} = \80,000 + $15,000 = $95,000$
Finally, use the definition of net income to find revenues:
  • Net Income=Revenues−Expenses\text{Net Income} = \text{Revenues} - \text{Expenses}
  • (95,000 = \text{Revenues} - \50,000)
  • \text{Revenues} = \95,000 + $50,000 = $145,000$

Question 7

At the end of the year, a company had total assets of ($250,000) and owner's equity of ($110,000). During the year, assets had increased by ($60,000), while liabilities had decreased by ($10,000). What were the total liabilities at the beginning of the year?

  1. ($130,000)
  2. ($140,000)
  3. ($150,000) (correct answer)
  4. ($190,000)
Explanation: This problem requires working backwards.
  1. Calculate liabilities at the end of the year: Ending Liabilities = Ending Assets - Ending Equity = (250,000 - \110,000 = $140,000).
  2. Use the information about the change in liabilities to find the beginning balance. We know: Ending Liabilities = Beginning Liabilities + Change in Liabilities.
  3. Substitute the known values: (140,000 = \text{Beginning Liabilities} + (-\10,000)).
  4. Solve for Beginning Liabilities: Beginning Liabilities = (140,000 + \10,000 = $150,000).

Question 8

A corporation began the year with retained earnings of ($80,000). During the year, it reported revenues of ($150,000) and expenses of ($90,000). The ending retained earnings balance was ($125,000). If total assets increased by ($70,000) during the year and no stock was issued or repurchased, by how much did liabilities change?

  1. An increase of ($25,000) (correct answer)
  2. A decrease of ($15,000)
  3. An increase of ($45,000)
  4. An increase of ($10,000)
Explanation: This is a multi-step problem.
  1. Calculate Net Income: Revenues - Expenses = (150,000 - \90,000 = $60,000).
  2. Use the retained earnings roll-forward to find dividends: Ending RE = Beginning RE + Net Income - Dividends. (125,000 = \80,000 + $60,000 - \text{Dividends}). This gives (125,000 = \140,000 - \text{Dividends}), so Dividends = ($15,000).
  3. Calculate the total change in equity. With no stock transactions, \Delta\text{Equity} = \text{Net Income} - \text{Dividends} = \60,000 - $15,000 = $45,000$.
  4. Use the accounting equation to find the change in liabilities: ΔAssets=ΔLiabilities+ΔEquity\Delta\text{Assets} = \Delta\text{Liabilities} + \Delta\text{Equity}. (70,000 = \Delta\text{Liabilities} + \45,000).
  5. Solve for ΔLiabilities\Delta\text{Liabilities}: (70,000 - \45,000 = $25,000). Liabilities increased by ($25,000).

Question 9

A company with an existing credit balance in its Allowance for Doubtful Accounts determines that a specific customer's account receivable of ($1,000) is uncollectible and writes it off. What is the net effect of this write-off on the components of the accounting equation?

  1. Total assets decrease and total equity decreases.
  2. Total assets decrease and total liabilities increase.
  3. Total assets and total equity remain unchanged. (correct answer)
  4. Total assets increase and total equity increases.
Explanation: The entry to write off an uncollectible account involves a debit to the Allowance for Doubtful Accounts and a credit to Accounts Receivable. Accounts Receivable is an asset, and Allowance for Doubtful Accounts is a contra-asset account. Decreasing an asset (credit to Accounts Receivable) and decreasing a contra-asset (debit to Allowance for Doubtful Accounts) have an equal and opposite effect on the book value of total assets. Therefore, there is no change in total assets. Liabilities and equity are not affected by the write-off itself; the related expense was recognized earlier when the allowance was established.

Question 10

A company issued 1,000 shares of its common stock, with a par value of ($1) per share, in exchange for a parcel of land with a fair market value of ($40,000). How does this transaction affect the components of the accounting equation?

  1. Total assets increase by ($40,000) and total liabilities increase by ($40,000).
  2. Total assets increase by ($40,000) and total equity increases by ($40,000). (correct answer)
  3. Total assets increase by ($1,000), and total equity increases by ($1,000).
  4. There is no change in total assets, but equity increases by ($40,000) and liabilities decrease by ($40,000).
Explanation: The company acquires an asset, land, valued at its fair market value of ($40,000). In exchange, it provides ownership claims (equity) in the form of common stock. The transaction increases the Land account (an asset) by ($40,000) and increases the Common Stock and Additional Paid-in Capital accounts (equity) by a total of ($40,000). Liabilities are unaffected. Therefore, total assets and total equity both increase by ($40,000).

Question 11

The financial records of a company show that for a given period, the owner's claims on the company's resources increased by ($40,000) and the creditors' claims decreased by ($15,000). If the company's ending assets are ($200,000), what were its beginning assets?

  1. ($175,000) (correct answer)
  2. ($145,000)
  3. ($225,000)
  4. ($255,000)
Explanation: Owner's claims refer to equity, and creditors' claims refer to liabilities. The problem states that \Delta\text{Equity} = +\40,000andand\Delta\text{Liabilities} = -$15,000$.
  1. First, calculate the total change in assets using the accounting equation: ΔAssets=ΔLiabilities+ΔEquity\Delta\text{Assets} = \Delta\text{Liabilities} + \Delta\text{Equity}.
  2. \Delta\text{Assets} = (–\15,000) + $40,000 = +$25,000$. So, assets increased by ($25,000).
  3. Use this to find the beginning assets: Ending Assets = Beginning Assets + ΔAssets\Delta\text{Assets}.
  4. (200,000 = \text{Beginning Assets} + \25,000).
  5. Beginning Assets = (200,000 - \25,000 = $175,000).

Question 12

A company purchases a delivery truck with a list price of ($60,000). The company pays ($15,000) in cash and signs a five-year note payable for the remaining balance. What is the net effect of this transaction on the company's total assets?

  1. An increase of ($60,000)
  2. An increase of ($45,000) (correct answer)
  3. A decrease of ($15,000)
  4. No net change
Explanation: The transaction affects two asset accounts and one liability account. Assets increase because the company acquires a truck worth ($60,000). Assets decrease because the company pays ($15,000) in cash. The net effect on total assets is the increase from the truck minus the decrease in cash: (60,000 - \15,000 = $45,000). Concurrently, liabilities (Notes Payable) increase by ($45,000), keeping the accounting equation in balance (\Delta\text{Assets} \45,000 = \Delta\text{Liabilities} $45,000 + \Delta\text{Equity} $0$).

Question 13

In January, a company incurred and recorded a ($1,200) utility expense on account. In February, the company paid the full amount in cash. Which of the following describes the effect of the February payment on the accounting equation?

  1. Assets decrease and equity decreases.
  2. Assets decrease and liabilities decrease. (correct answer)
  3. Liabilities decrease and equity increases.
  4. There is no effect on the accounting equation.
Explanation: The expense was recognized in January, which decreased equity and increased liabilities (Accounts Payable) at that time. The payment in February is the settlement of that pre-existing liability. The payment decreases assets (Cash) by ($1,200) and decreases liabilities (Accounts Payable) by ($1,200). Equity is not affected by the cash payment itself, as the expense has already been recorded.

Question 14

During a fiscal period, a company's total assets increased by ($75,000), and its total liabilities decreased by ($20,000). The company issued no new stock during the period. If the company paid ($10,000) in dividends, what was its net income for the period?

  1. ($45,000)
  2. ($55,000)
  3. ($95,000)
  4. ($105,000) (correct answer)
Explanation: The accounting equation states that ΔAssets=ΔLiabilities+ΔEquity\Delta\text{Assets} = \Delta\text{Liabilities} + \Delta\text{Equity}. We can solve for the change in equity:
  • ΔEquity=ΔAssets−ΔLiabilities\Delta\text{Equity} = \Delta\text{Assets} - \Delta\text{Liabilities}
  • \Delta\text{Equity} = \75,000 - (-$20,000) = $95,000$
The change in equity is also explained by net income, stock issuances, and dividends: ΔEquity=Net Income−Dividends+Stock Issuances\Delta\text{Equity} = \text{Net Income} - \text{Dividends} + \text{Stock Issuances}. Since no stock was issued:
  • (95,000 = \text{Net Income} - \10,000)
  • \text{Net Income} = \95,000 + $10,000 = $105,000$

Question 15

A company ended the year with liabilities of ($90,000) and equity of ($140,000). During the year, equity had increased by ($30,000) and liabilities had decreased by ($20,000). What were the company's total assets at the beginning of the year?

  1. ($220,000) (correct answer)
  2. ($230,000)
  3. ($180,000)
  4. ($240,000)
Explanation: This problem requires working backwards from ending balances to beginning balances.
  1. Find beginning liabilities: Ending Liabilities = Beginning Liabilities - ($20,000). So, Beginning Liabilities = (90,000 + \20,000 = $110,000).
  2. Find beginning equity: Ending Equity = Beginning Equity + ($30,000). So, Beginning Equity = (140,000 - \30,000 = $110,000).
  3. Calculate beginning assets using the beginning balances of liabilities and equity: Beginning Assets = Beginning Liabilities + Beginning Equity = (110,000 + \110,000 = $220,000).

Question 16

A company uses ($25,000) of its cash to purchase a certificate of deposit (CD) that matures in 90 days. How does this transaction affect the company's total assets, total liabilities, and total equity?

  1. Total assets decrease and total equity decreases.
  2. Total assets increase and total liabilities increase.
  3. Total assets and total liabilities both decrease.
  4. There is no change in total assets, total liabilities, or total equity. (correct answer)
Explanation: This transaction is an exchange of one asset (Cash) for another asset (Certificate of Deposit, a short-term investment). The Cash account decreases by ($25,000), and the Investments account increases by ($25,000). The net effect on total assets is zero. Since no liabilities or equity accounts are involved, there is no change to total liabilities or total equity.

Question 17

In March, a consulting firm provided services to a client for an agreed-upon price of ($8,000). The firm received ($3,000) cash in March and will receive the remaining ($5,000) in April. According to the accrual basis of accounting, what is the total effect of this event on the firm's accounting equation in March?

  1. Assets increase by ($3,000) and Equity increases by ($3,000).
  2. Assets increase by ($8,000) and Equity increases by ($8,000). (correct answer)
  3. Assets increase by ($8,000) and Liabilities increase by ($8,000).
  4. Assets increase by ($3,000) and Liabilities decrease by ($5,000).
Explanation: Under accrual accounting, revenue is recognized when it is earned, regardless of when cash is received. The firm earned the full ($8,000) in March. This increases Equity (Retained Earnings via Revenue) by ($8,000). The assets received consist of ($3,000) in Cash and a ($5,000) claim to future cash (Accounts Receivable). Thus, total assets increase by (3,000 + \5,000 = $8,000). The equation remains in balance as Assets increase by ($8,000) and Equity increases by ($8,000).

Question 18

A bookkeeper for a small company recorded the purchase of a ($12,000) piece of equipment on credit by debiting Rent Expense and crediting Accounts Payable. The error was not discovered until after the financial statements for the period were prepared. What is the effect of this error on the accounting equation at the end of the period?

  1. Assets are understated and equity is understated. (correct answer)
  2. Assets are overstated and liabilities are understated.
  3. Liabilities are overstated and equity is understated.
  4. Assets are understated and liabilities are overstated.
Explanation: The correct entry should have been a debit to Equipment (an asset) and a credit to Accounts Payable (a liability). This would increase assets and increase liabilities, with no effect on equity. The incorrect entry was a debit to Rent Expense (which decreases equity) and a credit to Accounts Payable (which increases liabilities). Comparing the incorrect entry to the correct one:
  • Assets: The Equipment account was never increased, so assets are understated by ($12,000).
  • Liabilities: The Accounts Payable account was credited in both scenarios, so liabilities are correctly stated.
  • Equity: An expense was recorded that should not have been, which reduced net income and thus reduced equity. Equity is understated by ($12,000). Therefore, the net effect is that assets are understated and equity is understated.

Question 19

At the beginning of the fiscal year, a company had total assets of ($400,000) and total liabilities of ($150,000). During the year, the company engaged in the following transactions:

  1. Purchased equipment for ($50,000) on credit.

  2. Provided services to a client and received ($30,000) in cash.

  3. Paid salaries of ($20,000) in cash.

  4. Paid down ($25,000) of its existing accounts payable.

What are the company's total assets at the end of the fiscal year?

  1. ($385,000)
  2. ($435,000) (correct answer)
  3. ($455,000)
  4. ($480,000)
Explanation: To find the ending total assets, we start with the beginning balance and adjust for the net effect of the year's transactions on assets.
  • Beginning Assets: ($400,000)
    1. Purchase equipment on credit: Increases Assets (Equipment) by ($50,000).
    1. Services for cash: Increases Assets (Cash) by ($30,000).
    1. Paid salaries: Decreases Assets (Cash) by ($20,000).
    1. Paid accounts payable: Decreases Assets (Cash) by ($25,000).
Net change in assets = (50,000+50,000 + 30,000 - 20,000−20,000 - 25,000 = +35,000\). Ending Assets = Beginning Assets + Net Change = \(400,000 + 35,000=35,000 = 435,000).

Question 20

Coastal Manufacturing started the year with total assets of $480,000 and total liabilities of $180,000. During the year, the company issued additional common stock for $60,000 cash, recorded net income of $95,000, and paid dividends of $25,000. If total liabilities increased by $40,000 during the year, what are the company's total assets at year-end?

  1. $650,000 (correct answer)
  2. $610,000
  3. $570,000
  4. $590,000
Explanation: Using the accounting equation A = L + E, we need to track all changes. Beginning equity = $480,000 - $180,000 = 300,000.Equitychanges:+300,000. Equity changes: +60,000 (stock issuance) +95,000(netincome)−95,000 (net income) -25,000 (dividends) = +$130,000. Ending equity = $300,000 + $130,000 = $430,000. Ending liabilities = $180,000 + $40,000 = $220,000. Therefore, ending assets = $220,000 + $430,000 = $650,000. Choice B incorrectly omits the stock issuance. Choice C incorrectly subtracts the liability increase from assets. Choice D incorrectly treats dividends as reducing liabilities instead of equity.