Accounting Equation
What is the accounting equation
Assets - liabilities = owner's equity (assets = liabilities + owner's equity)
Define asset.
Anything that is cash or can be turned into cash
Define Liability
Something the business owes; an obligation or debt
Define owner’s equity
The owner’s financial claim on the assets of the business
A balance sheet shows what three main sections?
Assets, Liabilities, and Owner’s Equity
If assets are $25,000 and liabilities are $10,000, what is owner’s equity?
$15,000
Which account records money customers owe you?
Accounts Receivable
Give one example of a liability account.
Accounts payable, notes payable, loan payable
What happens to equity when the owner invests $2,000 cash?
Equity increases
The left side of the balance sheet shows what?
Assets
If you perform $2,000 of services on account, what increases and by how much?
Assets and Owner's Equity
Buying equipment with cash does what to your assets?
It increases and decreases because you're using cash to buy something that has cash value
Borrowing $5,000 from the bank affects which liability?
Loan Payable
Which two things reduce owner’s equity?
Expenses and Owner Withdrawals
Which statement shows profit or loss (not the balance sheet)?
Income Statement
Paying $500 salaries expense affects which two parts of the equation?
Assets and Owner's Equity
Which asset decreases when you pay a bill?
Paying $400 on an account payable does what to assets and liabilities?
Decreases both
Service revenue increases which part of the equation?
Owner's Equity
Why must the balance sheet always balance?
Because every transaction affects both sides of the accounting equation
If assets increase by $7,000 and equity increases by $2,000, what must liabilities do?
Increase by $5,000
Name 3 asset accounts you would see on a balance sheet.
Cash, Accounts Receivable, Supplies, Equipment, Furniture, Building
Which liability arises when you buy supplies on credit?
Accounts Payable
If assets are $40,000 and liabilities are $15,000, what is equity?
$25,000
If the balance sheet is out of balance, what likely happened?
A transaction was recorded incorrectly or incompletely