## Thursday, March 13, 2008

### Using the Accounting Equation and Example problems

The assets of a particular business belong to resource providers who have claims on these assets. In other terms, every asset has its own source provided by either an owner or a creditor. Therefore, there may not be any claim without an appropriate asset or vice versa. The accounting equation is:

 Assets = Claims

Claims are divided into two categories: owners' claims (equity) and creditors' claims (liabilities):

 _ Claims Assets = Liabilities + Equity

Accounting Equation Formula:

 Equity Assets = Liabilities + Contributed Capital + Retained Earnings

 Claims Assets = Liabilities + Equity \$700 = \$300 + \$400

1. Fun Company purchases a machine for \$18,000 on credit, and a month later makes a partial payment of \$10,000 for the machine. The overall result of the 2 transactions combined will cause:

A. Total Equity to decrease by \$8,000
B. Total Liabilities to increase by \$8,000
C. Total Assets to decrease by \$8,000
D. Total Assets to remain unchanged
E. Total Assets to decrease by \$10,000

2. If the liabilities of a business increased \$92,000 during a period and the assets in the business increased \$30,000 during the same period, the equities of the business must have:

A. Decreased \$62,000
B. Decreased \$122,000
C. Increased \$122,000
D. Decreased \$92,000
E. Increased \$62,000

1.B
2.A