Q: Which of the following best describes the accounting equation after considering liabilities supplied by third parties?

$$\text{Assets} = \text{Capital} + \text{Liabilities}$$

Q: A business has assets of €50,000 and liabilities of €20,000. What is the owner's capital?

$$\text{Capital} = \text{Assets} - \text{Liabilities} = 50,000 - 20,000 = 30,000$$

Q: Mr. Smart bought a vehicle for €2,000, premises for €5,000, and inventory for €1,000 (not fully paid). He borrowed €3,000 and has €800 in the bank. What is his capital on 1st August 2020?

$$\text{Capital} = \text{Assets} - \text{Liabilities} = (2,000 + 5,000 + 1,000 + 800) - 3,000 = 8,800 - 3,000 = 5,800$$

Question 1

Which of the following best describes the accounting equation after considering liabilities supplied by third parties?

Accepted Answer

$$	ext{Assets} = 	ext{Capital} + 	ext{Liabilities}$$

Question 2

A business has assets of €50,000 and liabilities of €20,000. What is the owner's capital?

Accepted Answer

$$	ext{Capital} = 	ext{Assets} - 	ext{Liabilities} = 50,000 - 20,000 = 30,000$$

Question 3

Which of the following is NOT considered an asset in the accounting equation?

Accepted Answer

Accounts Payable

Question 4

If a business purchases inventory worth €10,000 on credit, how does this affect the accounting equation?

Accepted Answer

Assets increase by €10,000; Liabilities increase by €10,000; Capital remains unchanged.

Question 5

Which transaction would decrease both assets and liabilities by the same amount?

Accepted Answer

Paying off a supplier for goods previously bought on credit

Question 6

Mr. Smart bought a vehicle for €2,000, premises for €5,000, and inventory for €1,000 (not fully paid). He borrowed €3,000 and has €800 in the bank. What is his capital on 1st August 2020?

Accepted Answer

$$	ext{Capital} = 	ext{Assets} - 	ext{Liabilities} = (2,000 + 5,000 + 1,000 + 800) - 3,000 = 8,800 - 3,000 = 5,800$$

Question 7

Which of the following best defines 'Liabilities' in the context of the accounting equation?

Accepted Answer

Amounts owed to third parties for goods or services supplied to the business

Question 8

A business sells goods costing €5,000 for €7,000 cash. What is the immediate effect on the accounting equation?

Accepted Answer

Assets increase by €2,000 (profit); Inventory decreases by €5,000; Cash increases by €7,000; Capital increases by €2,000.

Question 9

Which statement is TRUE regarding the Statement of Financial Position?

Accepted Answer

It represents the accounting equation at a specific point in time.

Question 10

If a business collects €2,000 from a customer who previously bought goods on credit, what is the effect on the Statement of Financial Position?

Accepted Answer

Accounts Receivable decreases by €2,000; Cash at Bank increases by €2,000; Total assets remain unchanged.

Question 11

Which of the following transactions would NOT affect the capital in the accounting equation?

Accepted Answer

Purchasing inventory on credit

Question 12

Mr. Kelly's Statement of Financial Position includes: Capital €10,200, Equipment €5,400, Accounts Payable €4,100, Inventory €3,600, Accounts Receivable €4,500, Cash at Bank €2,800. What is the total value of his assets?

Accepted Answer

$$5,400 + 3,600 + 4,500 + 2,800 = 16,300$$

Question 13

Which formula would you use to calculate liabilities if you know assets and capital?

Accepted Answer

$$	ext{Liabilities} = 	ext{Assets} - 	ext{Capital}$$

Question 14

Which of the following is the correct rearrangement of the accounting equation to solve for capital?

Accepted Answer

$$	ext{Capital} = 	ext{Assets} - 	ext{Liabilities}$$

Question 15

A business has assets of €100,000, capital of €60,000, and liabilities of €40,000. Which equation confirms the accounting equation is balanced?

Accepted Answer

$$	ext{Assets} = 	ext{Capital} + 	ext{Liabilities} = 60,000 + 40,000 = 100,000$$

Question 16

Which of the following is TRUE about every transaction in the accounting equation?

Accepted Answer

Every transaction affects at least two items in the accounting equation.

Question 17

If a business owner withdraws €5,000 cash for personal use, what is the effect on the accounting equation?

Accepted Answer

Assets decrease by €5,000; Capital decreases by €5,000; Liabilities remain unchanged.

Question 18

Which of the following best describes 'Capital' in the accounting equation?

Accepted Answer

Owner's equity or net worth

Question 19

A business purchases a building for €150,000 by cheque. What is the effect on the Statement of Financial Position?

Accepted Answer

Buildings (assets) increase by €150,000; Cash at Bank (assets) decrease by €150,000; Total assets remain unchanged.

The Accounting Equation: Foundations and Applications in Financial Accounting

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