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Quizzes > Business & Finance > Finance & Economics

Challenge Yourself with the Accounting Equation Practice Quiz

Ready for accounting equation questions? Dive in and test your fundamentals!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art accounting equation scene with calculator ledger pencil charts on dark blue background for practice quiz

This accounting equation practice quiz helps you check your grasp of how assets, liabilities, and equity balance, so you can find gaps before class or an exam. Get instant results, work at your pace, and build confidence with quick, focused questions. Want more? Try more practice or take the ultimate quiz when you feel ready.

What is the fundamental accounting equation that underpins double-entry bookkeeping?
Assets = Liabilities + Equity
Assets + Liabilities = Equity
Equity = Assets - Liabilities
Assets - Equity = Liabilities
The fundamental accounting equation states that a company's assets are financed by liabilities and equity. It ensures that every transaction maintains the balance of the ledger. This equation is the backbone of double-entry bookkeeping. .
If a business takes out a bank loan of $10,000 in cash, how does the accounting equation change?
Assets increase by $10,000 and liabilities increase by $10,000
Assets decrease by $10,000 and liabilities decrease by $10,000
Assets increase by $10,000 and equity increases by $10,000
Assets and equity both decrease by $10,000
When a loan is received, cash (an asset) increases and the loan payable (a liability) increases by the same amount. Equity is unaffected at this stage because the funds are borrowed rather than earned. This preserves the balance in the accounting equation. .
A company purchases equipment for $8,000 in cash. What is the effect on its accounting equation?
Liabilities increase by $8,000 and equity decreases by $8,000
Equipment increases by $8,000 and cash decreases by $8,000
Cash increases by $8,000 and liabilities increase by $8,000
Equipment and equity increase by $8,000
Purchasing equipment for cash shifts value between asset accounts: equipment goes up while cash goes down. Total assets remain the same because one asset replaces another. Liabilities and equity are unaffected by this exchange transaction. .
When a company issues common stock for $5,000 in cash, which accounts are affected?
Equity increases by $5,000 and liabilities increase by $5,000
Cash increases by $5,000 and liabilities decrease by $5,000
Cash decreases by $5,000 and equity decreases by $5,000
Cash increases by $5,000 and equity increases by $5,000
Issuing stock increases cash, an asset, and increases common stock, part of equity. No liabilities are involved because the funds come from owners. This transaction keeps assets equal to liabilities plus equity. .
A company collects $5,000 of accounts receivable in cash. How does this affect the accounting equation?
Cash increases by $5,000 and accounts receivable decreases by $5,000
Accounts receivable increases by $5,000 and liabilities increase by $5,000
Liabilities decrease by $5,000 and equity increases by $5,000
Cash increases by $5,000 and equity increases by $5,000
Collecting receivables moves money from accounts receivable to cash. Both accounts are assets, so total assets remain constant. There is no impact on liabilities or equity because the sale was recognized earlier. .
Paying $2,000 for wages expense in cash will have what effect on the basic accounting equation?
Equity increases by $2,000 and liabilities increase by $2,000
Assets increase by $2,000 and expenses increase by $2,000
Liabilities decrease by $2,000 and equity decreases by $2,000
Assets decrease by $2,000 and equity decreases by $2,000
Paying wages uses cash (an asset), decreasing assets. Wages expense reduces net income and therefore retained earnings, part of equity. Liabilities are not affected because no borrowing occurs. .
A business purchases inventory costing $7,000 on credit. What is the immediate effect on the accounting equation?
Equity increases by $7,000 and liabilities increase by $7,000
Inventory decreases by $7,000 and cash decreases by $7,000
Cash increases by $7,000 and liabilities increase by $7,000
Inventory increases by $7,000 and liabilities increase by $7,000
Buying inventory on credit raises inventory (an asset) and accounts payable (a liability). Cash is unaffected until payment. Equity does not change because costs are not yet expensed. .
When a company declares a dividend of $3,000 but has not yet paid it, how is the accounting equation impacted?
Liabilities increase by $3,000 and equity decreases by $3,000
Equity increases by $3,000 and liabilities decrease by $3,000
Assets decrease by $3,000 and equity decreases by $3,000
Assets increase by $3,000 and liabilities decrease by $3,000
Declaring dividends creates a dividends payable liability. Equity (retained earnings) decreases because earnings are distributed. Cash is unaffected until the dividend is paid. .
A business issues a $40,000 note payable to purchase machinery. Which accounts change and how?
Machinery increases by $40,000 and equity increases by $40,000
Notes payable decreases by $40,000 and equity decreases by $40,000
Machinery increases by $40,000 and notes payable increases by $40,000
Cash increases by $40,000 and notes payable increases by $40,000
Issuing a note payable to buy machinery raises a noncurrent liability (notes payable) and a noncurrent asset (machinery). Cash is not involved in this financing arrangement. Equity remains unchanged since no owner investment or earnings event occurred. .
An owner invests $15,000 cash and $5,000 of equipment into a newly formed business. What is the effect on the accounting equation?
Cash increases by $15,000 and liabilities increase by $5,000
Equity increases by $15,000 and assets increase by $5,000
Equipment increases by $5,000 and liabilities increase by $15,000
Assets increase by $20,000 and equity increases by $20,000
The owner's contribution raises assets by combining cash and equipment. Equity increases by the total contributed amount, reflecting owner investment. Liabilities are unaffected because the assets come from the owner rather than borrowed funds. .
Recording $1,000 of depreciation expense on equipment will do which of the following?
Increase depreciation expense and increase cash by $1,000
Decrease equipment and decrease equity by $1,000
Increase accumulated depreciation and increase equity by $1,000
Decrease liabilities and decrease equipment by $1,000
Depreciation expense reduces net income, which lowers equity (retained earnings). Accumulated depreciation (a contra?asset) increases, reducing the net book value of equipment. No cash is involved in recording depreciation. .
A business goes through these transactions in order: invests $10,000 cash, buys equipment for $4,000 cash, borrows $6,000, purchases inventory on credit for $2,000, then pays $1,000 on accounts payable. What are the ending balances of assets, liabilities and equity?
Assets $16,000; Liabilities $8,000; Equity $8,000
Assets $17,000; Liabilities $7,000; Equity $10,000
Assets $18,000; Liabilities $6,000; Equity $12,000
Assets $15,000; Liabilities $7,000; Equity $8,000
Start with $10,000 in assets and equity. Equipment purchase brings cash to $6,000 and equipment $4,000. Borrowing adds $6,000 to cash and liabilities. Credit inventory adds $2,000 inventory and $2,000 payables. Paying $1,000 reduces cash and payables. Ending assets = cash $11,000 + equipment $4,000 + inventory $2,000 = $17,000; liabilities $7,000; equity $10,000. .
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Study Outcomes

  1. Understand Accounting Equation Components -

    Readers will be able to identify and define assets, liabilities, and equity to grasp the core elements of accounting equation practice.

  2. Apply the Accounting Equation to Transactions -

    Readers will use the basic accounting equation quiz format to determine how various transactions affect the financial position of a business.

  3. Analyze Accounting Equation Questions -

    Readers will evaluate different accounting equation questions to pinpoint how each event alters assets, liabilities, and equity.

  4. Interpret Accounting Equation Examples -

    Readers will work through illustrative accounting equation examples to reinforce their understanding of fundamental bookkeeping principles.

  5. Assess Proficiency with Instant Feedback -

    Readers will leverage immediate feedback from the scored quiz to measure and improve their grasp of understanding accounting equation concepts.

Cheat Sheet

  1. Core Accounting Equation -

    Assets = Liabilities + Equity is the bedrock of bookkeeping, and mastering this formula will anchor all your accounting equation practice. Refer to the FASB Conceptual Framework for authoritative definitions, and try a basic accounting equation quiz to see it in action.

  2. Rearranging for Unknowns -

    Often you'll need to solve for liabilities or equity by reordering the equation: Equity = Assets - Liabilities or Liabilities = Assets - Equity. This trick is essential for most accounting equation questions and helps you tackle any basic accounting equation quiz with confidence.

  3. Double-Entry Effects -

    Every transaction affects at least two accounts, keeping the accounting equation balanced - an approach detailed in Weygandt's Principles of Financial Accounting. Practicing with real transactions in your accounting equation practice reinforces how debits and credits maintain equilibrium. This hands-on drilling enhances your understanding of the accounting equation fundamentals for more accurate record-keeping.

  4. Equity Components -

    Equity combines contributed capital, retained earnings, and drawing accounts; understanding these subparts is crucial for interpreting your financial position. Use accounting equation examples from university modules (e.g., University of Illinois's ACCT101) to see how profits and withdrawals flow into equity. A simple mnemonic - ACE (Assets = Capital + Earnings) - can help cement the concept.

  5. Real vs. Nominal Accounts -

    Real (balance sheet) accounts carry balances forward, while nominal (income statement) accounts reset each period - a distinction emphasized by the IFRS framework. Testing yourself with a basic accounting equation quiz that mixes asset, liability, revenue, and expense entries will sharpen your understanding. Remember to transfer nominal balances to retained earnings at year-end to see the full impact on equity.

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