Financial Accounting Quiz: Checking Accounting Equation Balance
20 questions · exam conditions
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Checking Accounting Equation BalanceQuestion 1 of 20

Company Z's balance sheet shows total assets of $450,000 and total liabilities of $195,000. The company then executes the following transactions in sequence: (1) collects $30,000 of accounts receivable, (2) purchases inventory for $25,000 on account, (3) pays $15,000 cash for equipment, and (4) obtains a $40,000 bank loan. After these transactions, what is the total stockholders' equity?

$255,000, representing original equity unchanged by these transactions
$280,000, reflecting the net cash increase from the loan
$295,000, calculated from final asset and liability balances
$235,000, representing equity after all cash outflows
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Financial Accounting Quiz

Financial Accounting Quiz: Checking Accounting Equation Balance

Practice Checking Accounting Equation Balance 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 Checking Accounting Equation Balance, 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

Company Z's balance sheet shows total assets of $450,000 and total liabilities of $195,000. The company then executes the following transactions in sequence: (1) collects $30,000 of accounts receivable, (2) purchases inventory for $25,000 on account, (3) pays $15,000 cash for equipment, and (4) obtains a $40,000 bank loan. After these transactions, what is the total stockholders' equity?

  1. $255,000, representing original equity unchanged by these transactions (correct answer)
  2. $280,000, reflecting the net cash increase from the loan
  3. $295,000, calculated from final asset and liability balances
  4. $235,000, representing equity after all cash outflows
Explanation: Original equity = $450,000 - $195,000 = $255,000. Transaction analysis: (1) Asset exchange (cash up, A/R down) - no equity effect; (2) Assets up $25,000, liabilities up $25,000 - no equity effect; (3) Asset exchange (equipment up, cash down) - no equity effect; (4) Assets up $40,000, liabilities up $40,000 - no equity effect. Since none of these transactions affect revenues, expenses, dividends, or capital contributions, equity remains $255,000. Other choices incorrectly assume equity changes from balance sheet transactions.

Question 2

At the end of the fiscal year, a company makes an adjusting entry to accrue $8,000 in salaries that have been earned by employees but not yet paid. What is the immediate effect of this entry on the accounting equation?

  1. Assets decrease by $8,000 and equity decreases by $8,000.
  2. Liabilities increase by $8,000 and equity decreases by $8,000. (correct answer)
  3. There is no effect on the accounting equation until the salaries are paid.
  4. Assets decrease by $8,000 and liabilities decrease by $8,000.
Explanation: Accruing an expense means recognizing it in the period it was incurred, regardless of when cash is paid. This adjusting entry involves debiting Salaries Expense and crediting Salaries Payable. The increase in Salaries Expense reduces net income, which in turn reduces retained earnings and thus total equity by $8,000. The credit to Salaries Payable increases total liabilities by 8,000.Theaccountingequationremainsbalancedastheincreaseontheliabilitiessideisoffsetbythedecreaseontheequityside(Assets=Liabilities[+8,000. The accounting equation remains balanced as the increase on the liabilities side is offset by the decrease on the equity side (Assets = Liabilities [+8,000] + Equity [-$8,000]).

Question 3

A company begins the month with assets of $200,000, liabilities of $80,000, and equity of $120,000. During the month, the company issues additional stock for $30,000 cash, purchases equipment for $50,000 by paying $10,000 in cash and signing a note for the remainder, and pays $5,000 in cash dividends. Assuming no other transactions, what is the total of liabilities and equity at the end of the month?

  1. $225,000
  2. $235,000
  3. $265,000 (correct answer)
  4. $275,000
Explanation: The accounting equation is Assets = Liabilities + Equity. Starting with beginning balances of L+E = $80,000 + $120,000 = $200,000. During the month: (1) Issuing stock for cash increases equity by $30,000. (2) Purchasing equipment by signing a note increases liabilities by 40,000(40,000 (50,000 cost - $10,000 cash paid). (3) Paying cash dividends decreases equity by $5,000. Ending liabilities = $80,000 + $40,000 = $120,000. Ending equity = $120,000 + $30,000 - $5,000 = $145,000. Total ending L+E = $120,000 + $145,000 = $265,000.

Question 4

A firm receives $12,000 cash from a client for services to be performed evenly over the next six months. Immediately after this transaction is recorded, what is the effect on the firm's accounting equation?

  1. Assets increase by $12,000 and equity increases by $12,000.
  2. Assets increase by $12,000 and liabilities increase by $12,000. (correct answer)
  3. Both assets and equity increase by $2,000, with no other changes.
  4. There is no net change in total assets, but equity and liabilities both increase.
Explanation: The receipt of cash before services are rendered creates a liability called Unearned Revenue. The company has an obligation to provide services in the future. Therefore, the asset account Cash increases by $12,000, and the liability account Unearned Revenue increases by $12,000. This keeps the accounting equation (Assets = Liabilities + Equity) in balance. Equity is not affected until the revenue is actually earned by performing the services.

Question 5

A company declares and pays a cash dividend. What is the effect of this event on the accounting equation?

  1. Decreases assets and decreases liabilities.
  2. No change to total assets, but a decrease in equity and an increase in liabilities.
  3. Decreases liabilities and increases equity.
  4. Decreases assets and decreases equity. (correct answer)
Explanation: Paying a cash dividend involves an outflow of cash, which decreases assets. Dividends are a distribution of profits to shareholders, which reduces the company's retained earnings. Retained earnings are a component of stockholders' equity. Therefore, paying a cash dividend decreases assets (Cash) and decreases equity (Retained Earnings). The equation A = L + E remains balanced because both sides decrease by the same amount.

Question 6

A company reports the following account balances at year-end: Cash $45,000, Accounts Receivable $32,000, Equipment $85,000, Accumulated Depreciation $18,000, Accounts Payable $28,000, Notes Payable $55,000, and Common Stock $61,000. If the accounting equation is to remain balanced, what amount should be reported for Retained Earnings?

  1. $144,000
  2. $18,000 debit balance
  3. $0, indicating no retained earnings exist (correct answer)
  4. $162,000 representing cumulative income
Explanation: Total assets = $45,000 + $32,000 + $85,000 - $18,000 = $144,000. Total liabilities = $28,000 + $55,000 = $83,000. Therefore, total equity must be $144,000 - $83,000 = $61,000. Since Common Stock is $61,000, Retained Earnings must be $0 to balance the equation. Choice A incorrectly uses total assets. Choice B is incorrect because Retained Earnings cannot have a debit balance in this context. Choice D incorrectly adds Common Stock to total assets.

Question 7

A bookkeeper mistakenly recorded a $3,000 cash payment for an accounts payable by debiting Accounts Payable for $3,000 but crediting Service Revenue for $3,000. The credit to Cash was omitted. What is the state of the accounting equation immediately after this erroneous entry is posted?

  1. The equation is in balance, but assets and equity are overstated.
  2. The equation is out of balance; liabilities are understated and equity is overstated by the same amount.
  3. The equation is out of balance; assets are overstated, liabilities are understated, and equity is overstated. (correct answer)
  4. The equation is in balance, but liabilities are understated and equity is overstated.
Explanation: Let's analyze the error's effect. The correct entry should have been a debit to Accounts Payable (-L) and a credit to Cash (-A). The erroneous entry was a debit to Accounts Payable (-L) and a credit to Service Revenue (+E). The omission of the credit to Cash means Assets are overstated by $3,000. The debit to Accounts Payable correctly decreased Liabilities by $3,000. The incorrect credit to Service Revenue increased Equity by $3,000. The net result is: Assets are $3,000 too high, Liabilities are $3,000 too low, and Equity is $3,000 too high. The equation A = L + E becomes (A + $3k) = (L - $3k) + (E + $3k), which simplifies to A + $3k = L + E. The left side is $3,000 higher than the right side, so the equation is out of balance.

Question 8

A corporation with a positive balance in retained earnings repurchases 1,000 shares of its own common stock for $20 per share and will hold them as treasury stock. How does this transaction affect the accounting equation?

  1. Assets decrease by $20,000 and liabilities decrease by $20,000.
  2. This transaction has no effect on the total of the accounting equation.
  3. Assets decrease by $20,000 and equity increases by $20,000.
  4. Assets decrease by $20,000 and equity decreases by $20,000. (correct answer)
Explanation: The repurchase of a company's own stock is recorded in a contra-equity account called Treasury Stock. The company uses cash to buy the shares, so Assets (Cash) decrease by 1,000 shares * $20/share = $20,000. Treasury Stock is a component of stockholders' equity and has a normal debit balance, which means it reduces total stockholders' equity. Therefore, Equity decreases by $20,000. The accounting equation remains balanced as both sides decrease by the same amount.

Question 9

An accountant correctly debits Supplies Expense for a $750 purchase but mistakenly credits Accounts Payable instead of Cash, as the supplies were paid for immediately. How does this error affect the accounting equation?

  1. The equation is out of balance; assets are overstated while equity is understated.
  2. The equation remains in balance, but assets are overstated and equity is understated.
  3. The equation is out of balance; liabilities are overstated while equity is understated.
  4. The equation remains in balance, but both assets and liabilities are overstated. (correct answer)
Explanation: Let's analyze the components. The debit to Supplies Expense correctly reduces equity by $750. The credit to Accounts Payable increases liabilities by $750. The error is that Cash was not credited, so the Cash account (an asset) is overstated by $750. The state of the equation is: Assets are overstated by $750. Liabilities are overstated by $750. Equity is correctly stated (since the expense was recorded). Let's check the balance: A = L + E. After the error: (A + $750) = (L + 750)+E.Sincebothsidesoftheequationareincreasedbythesameamount(750) + E. Since both sides of the equation are increased by the same amount (750), the equation remains in balance. However, the reported values for assets and liabilities are both incorrect (overstated).

Question 10

A company has the following balances at the beginning of the year: Assets = $150,000; Liabilities = $60,000. At the end of the year, assets are $180,000. During the year, the owner withdrew $10,000 for personal use (dividends) and the company reported net income of $25,000. No stock was issued or repurchased. What were the total liabilities at the end of the year?

  1. $75,000 (correct answer)
  2. $85,000
  3. $70,000
  4. $45,000
Explanation: This is a multi-step problem. First, find the beginning equity: Beg. Assets (150k)=Beg.Liabilities(150k) = Beg. Liabilities (60k) + Beg. Equity. So, Beg. Equity = $90,000. Second, calculate the ending equity: End. Equity = Beg. Equity + Net Income - Dividends. End. Equity = $90,000 + $25,000 - $10,000 = 105,000.Third,usetheendingaccountingequationtofindendingliabilities:End.Assets(105,000. Third, use the ending accounting equation to find ending liabilities: End. Assets (180k) = End. Liabilities + End. Equity ($105k). So, End. Liabilities = $180,000 - $105,000 = $75,000.

Question 11

A firm's assets equal $500,000 and its equity is $200,000. The firm then acquires a new building by paying $80,000 in cash and signing a $300,000 mortgage. What is the firm's debt-to-equity ratio (Total Liabilities / Total Equity) after this transaction?

  1. 1.50 to 1
  2. 2.00 to 1
  3. 3.00 to 1 (correct answer)
  4. 1.60 to 1
Explanation: First, determine the initial liabilities: Assets (500k)=Liabilities+Equity(500k) = Liabilities + Equity (200k), so initial Liabilities = $300,000. The transaction increases assets by $300,000 (building cost = $80k cash + $300k mortgage) and decreases assets by $80,000 (cash payment), for a net increase of $300,000. Liabilities increase by the mortgage amount of $300,000. Equity is unchanged. After the transaction: Ending Liabilities = $300,000 + $300,000 = $600,000. Ending Equity = $200,000 (unchanged). Debt-to-equity ratio = $600,000 / $200,000 = 3.00 to 1.

Question 12

A company performs services for a client on account for $10,000. The company then pays its employees their weekly salaries of $3,000 in cash. What is the combined effect of these two transactions on the company's working capital (Current Assets - Current Liabilities) and its total equity?

  1. Working capital increases by $7,000; Equity increases by $10,000.
  2. Working capital increases by $10,000; Equity increases by $10,000.
  3. Working capital increases by $10,000; Equity increases by $7,000.
  4. Working capital increases by $7,000; Equity increases by $7,000. (correct answer)
Explanation: Let's analyze each transaction. 1) Performing services on account increases Accounts Receivable (a current asset) by $10,000 and increases Service Revenue (and thus equity) by $10,000. 2) Paying salaries decreases Cash (a current asset) by $3,000 and increases Salaries Expense (decreasing equity) by $3,000. Combined effect on Working Capital (Current Assets): AR increases by $10,000 and Cash decreases by $3,000, for a net increase of $7,000. Liabilities are unchanged. So working capital increases by $7,000. Combined effect on Equity: Revenue increases equity by $10,000 and the expense decreases equity by $3,000, for a net increase of $7,000. Thus, both working capital and equity increase by $7,000.

Question 13

A company's bookkeeper records a $5,000 payment for a utilities expense by debiting Equipment and crediting Cash for $5,000. What is the effect of this error on the accounting equation before any correction is made?

  1. Total assets are correct, but equity is overstated. (correct answer)
  2. Total assets are overstated and equity is overstated.
  3. The accounting equation is out of balance.
  4. Total assets and total equity are both understated.
Explanation: The erroneous entry debited an asset (Equipment) and credited an asset (Cash). This is an asset exchange, so the total amount of assets is unaffected (Equipment is overstated by $5,000, but Cash is understated by $5,000, a net zero effect on total assets). However, the transaction should have been a debit to Utilities Expense. By not recording the expense, net income is overstated, which means retained earnings (and thus total equity) are overstated by $5,000. Therefore, total assets are correct, but equity is overstated, causing the equation A = L + E to be out of balance (specifically, A < L + E).

Question 14

At the beginning of the period, a company had total assets of $300,000, total liabilities of $120,000, and common stock of $100,000. During the period, the company had the following summary transactions:

  1. Earned revenues of $90,000, of which $70,000 were collected in cash.

  2. Incurred and paid expenses of $55,000 in cash.

  3. Paid dividends of $5,000.

Based on the information provided in the passage, what are the total assets at the end of the period?

  1. $320,000
  2. $330,000 (correct answer)
  3. $350,000
  4. $360,000
Explanation: To find ending assets, track the changes in assets from each transaction: 1. Cash collected from revenues increases assets by $70,000. 2. The uncollected revenue increases Accounts Receivable by $90,000 - $70,000 = $20,000. 3. Cash paid for expenses decreases assets by $55,000. 4. Cash paid for dividends decreases assets by 5,000.Netchangeinassets=+5,000. Net change in assets = +70,000 + $20,000 - $55,000 - 5,000=+5,000 = +30,000. Ending Assets = $300,000 + $30,000 = $330,000.

Question 15

A company purchases a one-year insurance policy for $2,400 cash on December 1. The company's fiscal year ends on December 31. After the necessary adjusting entry is made on December 31, what is the net effect of the insurance on the accounting equation for the month of December?

  1. Assets decrease by $200 and equity decreases by $200. (correct answer)
  2. Assets decrease by $2,400 and equity decreases by $2,400.
  3. Assets are unchanged, but liabilities increase and equity decreases by $200.
  4. Assets decrease by $2,200 and equity decreases by $2,200.
Explanation: This requires two steps. First, the initial purchase on Dec 1 is an exchange of one asset for another: Cash decreases by $2,400, and a new asset, Prepaid Insurance, increases by $2,400. There is no change to the total assets at this point. Second, at year-end on Dec 31, an adjusting entry must recognize that one month of insurance has been used. The annual cost is $2,400, so the monthly cost is $2,400 / 12 = $200. This is recorded as a debit to Insurance Expense (decreasing equity) and a credit to Prepaid Insurance (decreasing assets). Thus, the net effect for December is that the asset Prepaid Insurance decreases by $200 and equity decreases by $200 due to the expense.

Question 16

At the beginning of the year, Company X had total equity of $180,000. During the year, the company purchased equipment for $45,000 cash, obtained a bank loan for $60,000, paid $25,000 in dividends, earned net income of $35,000, and issued common stock for $20,000. If the accounting equation remains balanced, what is the year-end total equity?

  1. $210,000, reflecting all cash flow changes during the period (correct answer)
  2. $270,000, representing beginning equity plus all positive changes
  3. $230,000, calculated as beginning equity plus net changes
  4. $195,000, representing equity after removing dividend payments
Explanation: Beginning equity: 180,000.Changesaffectingequity:Netincome(+180,000. Changes affecting equity: Net income (+35,000), Dividends (-25,000),Commonstockissuance(+25,000), Common stock issuance (+20,000). Equipment purchase and bank loan do not affect total equity (asset/asset exchange and asset/liability increase respectively). Year-end equity = $180,000 + $35,000 - $25,000 + $20,000 = $210,000. Choice B incorrectly includes equipment and loan. Choice C uses wrong calculation. Choice D omits stock issuance effect.

Question 17

A company's accounting records show the following after posting all journal entries for the month: Assets total $325,000, Liabilities total $140,000, Common Stock is $120,000, and Retained Earnings is $85,000. An accountant discovers that a $20,000 expense was recorded as an asset. What adjustment is needed to restore accounting equation balance?

  1. Decrease assets by $20,000 and increase liabilities by $20,000 to maintain balance
  2. Decrease assets by $20,000 and decrease retained earnings by $20,000 to correct the error (correct answer)
  3. Decrease assets by $40,000 and decrease retained earnings by $40,000 for proper correction
  4. Increase expenses by $20,000 and decrease common stock by $20,000 for equation balance
Explanation: When you encounter an accounting error correction problem, start by understanding the fundamental accounting equation: Assets = Liabilities + Stockholders' Equity (Common Stock + Retained Earnings). Any correction must maintain this balance. Let's trace through this error. Currently, the books show: Assets $325,000 = Liabilities $140,000 + Common Stock $120,000 + Retained Earnings $85,000. The equation balances at $325,000 on both sides. However, a $20,000 expense was incorrectly recorded as an asset. To correct this, you need to remove the $20,000 from assets (decreasing them to $305,000) and properly record it as an expense. Since expenses reduce net income, they ultimately decrease retained earnings by $20,000 (to $65,000). After correction: Assets $305,000 = Liabilities $140,000 + Common Stock $120,000 + Retained Earnings $65,000. Both sides equal $305,000, so the equation balances. Answer A incorrectly increases liabilities, but the error has nothing to do with amounts owed to creditors. Answer C doubles the correction amount to $40,000, which would overcorrect the error since only $20,000 was misclassified. Answer D suggests decreasing common stock, but this error doesn't affect the company's original capital contributions from shareholders. Study tip: For error corrections, always ask yourself two questions: "What accounts were affected incorrectly?" and "What should the correct entry have been?" Then make the adjusting entry that transforms the incorrect entry into the correct one while maintaining the accounting equation balance.

Question 18

During the current period, a company's total assets increased by $75,000 while total liabilities decreased by $25,000. The company issued additional common stock for $40,000 cash and declared dividends of $15,000. To maintain accounting equation balance, the net income for the period must be:

  1. $75,000, representing the total asset increase
  2. $35,000, calculated as asset change minus stock issuance
  3. $75,000, calculated as total equity change plus dividends (correct answer)
  4. $100,000, representing total change in equity components
Explanation: Total equity change = Asset increase + Liability decrease = $75,000 + $25,000 = 100,000.Thisequitychangecomesfrom:CommonStockincrease(100,000. This equity change comes from: Common Stock increase (40,000) + Retained Earnings change. Retained Earnings change = Net Income - Dividends. Therefore: $100,000 = $40,000 + (Net Income - $15,000). Solving: Net Income = $75,000. Choice A ignores liability changes. Choice B incorrectly subtracts stock issuance. Choice D represents total equity change, not net income.

Question 19

A company's preliminary trial balance shows: Cash $85,000, Accounts Receivable $62,000, Equipment $145,000, Accounts Payable $38,000, Long-term Debt $95,000, Common Stock $100,000, Retained Earnings $59,000. The bookkeeper discovers that a $12,000 collection of accounts receivable was never recorded. To restore proper accounting equation balance after recording this transaction, what should be the adjusted Retained Earnings balance?

  1. $47,000, reduced by the amount of the unrecorded collection
  2. $59,000, unchanged because the collection affects only asset accounts (correct answer)
  3. $71,000, increased by the amount of the unrecorded collection
  4. $51,000, adjusted to balance the corrected asset totals
Explanation: When you encounter questions about recording transactions that were missed, focus on how each transaction affects the accounting equation: Assets = liabilities + Equity. The key is understanding which accounts change and whether the transaction creates new value or simply moves existing value between accounts. Let's analyze what happens when the $12,000 collection of accounts receivable is recorded. This transaction increases Cash by $12,000 and decreases Accounts Receivable by $12,000. Since both accounts are assets, total assets remain unchanged at 292,000(292,000 (85,000 + $62,000 + $145,000). When total assets don't change, and no liabilities are affected, Retained Earnings must also remain unchanged to maintain accounting equation balance. Answer B is correct because the collection affects only asset accounts, leaving Retained Earnings at $59,000. Collections of accounts receivable don't create new revenue—the revenue was already recorded when the original sale occurred. Answer A incorrectly suggests Retained Earnings decreases to $47,000, which would violate the accounting equation since assets and liabilities are unchanged. Answer C wrongly assumes the collection creates additional revenue, increasing Retained Earnings to $71,000—but this double-counts revenue already recognized. Answer D proposes $51,000 through faulty logic that Retained Earnings must somehow adjust to "balance" the correction, misunderstanding that asset reclassifications don't affect equity. Remember: Collections of receivables are asset exchanges, not revenue events. When total assets and liabilities remain constant, equity accounts stay unchanged. Always verify your adjustments maintain the fundamental accounting equation balance.

Question 20

An accountant is reviewing a company's books and finds that total debits equal total credits on the trial balance, but suspects the accounting equation may still be unbalanced due to classification errors. Which of the following errors would cause the accounting equation to be unbalanced despite equal debits and credits?

  1. Recording a liability payment as a debit to expense instead of liability reduction
  2. Posting a revenue transaction as a credit to common stock instead of revenue
  3. Recording equipment purchase as inventory and accounts payable as notes payable
  4. None of these errors would unbalance the equation if debits equal credits (correct answer)
Explanation: If total debits equal total credits, the accounting equation must be balanced regardless of classification errors. The equation Assets = Liabilities + Equity is maintained by the double-entry system's debit/credit mechanism. Classification errors affect which specific accounts are reported but not the fundamental balance. Choice A involves expense (equity effect) vs liability - both sides change equally. Choice B misclassifies within equity but doesn't unbalance. Choice C misclassifies within asset and liability categories but maintains balance.