Accounting Equation

Accounting can be described as a process of managing and recording various kinds of financial transactions over a period that is related to businesses. Accounting is a vast subject with multiple functions and various aspects. Some of the steps involved in accounting are analysing, calculating, summarising, and then reporting the data recorded to convey valuable information to the company or businesses for financial planning and organisation. Accountancy helps in tracking, managing, and regulating expenditures and income, gathering important information for stakeholders, and using these quantitative data for business policies. In accounting, debits are cash flows outside of the businesses and credits refer to the cash flows that enter the business organisations. The debits and credits occur in a complementary way in the balance sheets. So, after every transaction, debits and credits must be in balance on the balance sheets of a business organisation. 

Accounting has a fundamental equation that constitutes the basis of all calculations there. That accounting equation is known as the balance sheet equation and showcases the relationship between assets, owner’s equity, and liabilities. Here, the total debt that is accrued is equal to the total credits. In businesses, capital means the equity of stockholders. As transactions in businesses affect both sides of the balance sheet, the equation is in balance. This means that the left side is equal to the right side on the balance sheet. The Accounting equation is expressed as the Assets = Liabilities + Equity. This is a simple equation that is foundational to double-entry sort of accounting. 

MCQs on Accounting Equation

Q1. What is capital?

1. 1. Capital is the equity of the stakeholders
   2. Capital is the goods involved in the production
   3. Capital is the total stock
   4. Capital is profit

Answer – A)

Q2. What are the constituents of the Accounting equation?

1. 1. A = L + C where A is assets, L is a liability and C is capital
   2. A = I + E where A is assets, I is the income and E is the equity
   3. A = L + E where A is assets, L is liability and E is equity
   4. L = A + E where L is Liability, A is assets and E is equity

Answer – C)

Q3. Why must both sides of the balance sheet be equal?

1. 1. because of transactions
   2. because of income and expenditure
   3. because of the accounting equation
   4. because purchases are made based on capital or debts which is reflected in the accounting equation

Answer – D)

Q4. Which of the following options is correct?

     A. Assets – Inventory, Cash, Equipment, Accounts Receivable

     Shareholders’ Equity – Retained Earnings and Share Capital

     Liabilities – Long term and short-term debts, Accounts payable

     B. Assets – Long term and short-term debts, cash

     Shareholders’ Equity – Retained earnings and Share Capital

     Liabilities – Inventory, Equipment, and Retained Earnings

     C. Assets – Inventory, Cash, Equipment, Accounts Receivable

     Shareholders’ Equity – Retained Earnings and Share Capital

      Liabilities – income and expenditure

      D. Assets – Retained earnings and Share Capital

      Shareholders’ Equity – Long term and short-term debts

      Liabilities – Inventory

Answer – A)

Q5. What is the meaning of bankruptcy when it comes to the assets of a business organisation? 

1. 1. Bankruptcy means an organization has lost its money
   2. Bankruptcy means an organisation can no longer earn any profits
   3. Bankruptcy means the assets that the company owned are sold and the funds obtained are used to clear debts
   4. none of the above

Answer – C)

Q6. If a company named GHY is thinking about purchasing $300 machine parts by cash, the transaction would lead to debit (+ $300) in equipment and cash (-$300). What will be the liability or equity in this scenario?

1. 1. equity and liabilities will be 0
   2. equity will be $300 but liabilities will be 0
   3. Liabilities will be $300 but equity will be 0
   4. No changes

Answer – A)

Q7. If a company UID purchases machine parts worth $300, but only has $200 in cash. The company could purchase by initially paying $200 but the remaining amount is still owed to the dealer. The debit that would result from lead in Equipment (+300) and Account Payable will be credited (+$200) and Cash will get a credit of (-$200). What will the balance sheet look like?

1. 1. no changes will be recorded
   2. transaction results in changes on both sides of the equation so there will be an increase of $200 on both sides
   3. There will be an increase in Liabilities alone
   4. There will be an increase in Assets alone

Answer – B)

Q8. Which of these combinations are correct?

1. 1. Total Liabilities – Current Liabilities and Non-Current Liabilities

          Total Assets – Non-Current Assets and Current Assets

          Total Shareholder’s Equity – Share Capital and Retained Earnings

       B. Total Liabilities – Current Liabilities

           Total Assets – Current Assets

           Total Shareholder’s Equity – Share Capital

       C. Only a is correct

       D. a and b are both correct

Answer – C)

Q9. Why is accountancy important in businesses?

1. 1. because it ensures compliance with statutes and gathers financial performance information for stakeholders
   2. because it helps in keeping track of expenditures and income
   3. because it helps in gathering quantitative information
   4. all of the above

Answer – D)

Q10. The skills essential for being an accountant are:

1. 1. good communications, proficiency in accounting practices, preparing financial statements, analysing data
   2. time management, critical thinking, accounting organisation capacities
   3. none of the above
   4. only a and b are true

Answer- D)

Q11. How many steps are there in an accounting cycle?

1. 1. 7 steps
   2. 8 steps
   3. 10 steps
   4. 5 steps

Answer – B)

Q12. This is important for keeping track of changes made to accounts over time, ensuring entries are derived correctly, and modeling as well analyse account balances. 

1. 1. accounting worksheet
   2. ledger
   3. bill
   4. cash book

Answer – A) 

Q13. It is a kind of document that is integral to accounting for its function as the financial statement reporting a business organisation’s shareholder equity, assets, and liabilities. 

1. 1. cash book
   2. accounting worksheet
   3. balance sheet
   4. ledger

Answer – C)

Q14. If the company GHT has reported that its total equity in the previous financial year was $40 billion with total liabilities being $100 billion. Then what are the total assets?

1. 1. $60 billion
   2. $100 billion
   3. $120 billion
   4. $140 billion

Answer – D)

Q15. If a company’s IOP has total assets of $350 billion with a total liability of $130 billion. What is the total equity?

1. 1. $220 billion
   2. b) $480 billion
   3. c) $300 billion
   4. d) $500 billion

Answer – A)

Q16. If a business purchases raw cotton and pays for the product in cash, it leads to an increase in the Inventory but reduces Cash Capital. Since in this scenario, more than two or two accounts experience changes when a transaction is made, the accounting system that operates in the business organisation is referred to as the:

1. 1. Accounting equation
   2. Balance sheet
   3. Double – Entry
   4. Accounting

Answer – C) 

Q17. Investors have to analyse and interpret the information given by the balance sheet and the accounting equation to understand if a given company has low liabilities or assets or has too many assets. The investors cannot directly gain long-term indication from analysing the accounting equation and have to consider other options as well. This is considered a:

1. 1. advantage
   2. feature
   3. limitation
   4. aspect

Answer – C)

Q18. This is the total value of an organisation that is expressed as dollars. It is essentially the amount that a company must be left with when that company has liquidated every asset that it owns and has cleared its dues or debts. The amount that is left is returned to stakeholders.

1. 1. assets
   2. liabilities
   3. equity
   4. none of the above

Answer – C)

Q19. What is the rearrangement of the accounting equation in accounting practice nowadays in most modern business organisations?

1. 1. A = L + E 
   2. A = L + E + Owner’s Drawings
   3. A = L + E + Owner’s Drawings + Expenses
   4. A = L + E – Owner’s Drawings + Revenues – Expenses

Answer – D)

Q20. Assets, Expenses, The Owner’s Equity, and the Revenue, as well as the Liabilities, are all parts of which of the following given below:

1. 1. types of accounting
   2. types of balances of sheet
   3. types of constituents of the accounting equation
   4. none of the above

Answer – A)