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:






Contributed Capital


Retained Earnings


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

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