The Accounting Equation & Concepts
State the fundamental accounting equation in its correct, most commonly used format.
Assets = Liabilities + Owner's Equity
This side of a standard T-account is always designated as the debit side.
Left side
When an owner decides to invest cash directly into their new business, this is how the owner’s capital account is affected.
Increased by a credit
A type of business that performs an activity for a structural fee, rather than selling physical products.
Service business
This is the most common type of withdrawal made by an owner from a business for personal use.
Withdrawal of cash
This popular video game lets players drop blocks into rows to clear lines, and its iconic theme music is a Russian folk song called "Korobeiniki."
Tetris
Complete the following structural rule: An amount recorded on the right side of a standard T-account is always a credit, whereas an amount recorded on the left side is always a debit. Therefore, if an account's total decreases are recorded on its left side, that account must have a normal balance on this side.
Credit side
This absolute rule states that after any financial activity or transaction occurs, this must happen to the accounting equation.
It must remain in balance.
An account balance will always increase on this specific side.
Normal balance side
This happens to a liability account when a business pays cash on account for money they previously owed.
Decreased by a debit
Anything of value that is owned by a person or a business entity.
Asset
True or False: By strict accounting definition, an owner's withdrawal is considered a business expense.
False
This is the world's largest ocean, covering more than 30% of the Earth's entire surface.
Pacific Ocean
When a business transaction affects exactly two different asset accounts, this must happen to those accounts to keep the equation balanced.
One asset must increase and the other must decrease.
This is the normal balance side of any revenue account.
Credit side
When cash is received on account from a customer, these are the exact changes made to the Cash and Accounts Receivable accounts.
Cash is increased with a debit and Accounts Receivable is decreased with a credit.
An amount of money that is owed by a business to an outside creditor.
Liability
This is how a drawing account is structurally increased and decreased.
Increased by debits and decreased by credits.
In the iconic movie Star Wars: A New Hope, this fuzzy, 7-foot-tall Wookiee serves as Han Solo's loyal co-pilot on the Millennium Falcon.
Chewbacca (Chewie)
This is the professional term for the standards, rules, and principles that accountants must follow when recording and reporting financial activities.
GAAP
To decrease an asset account, you must record the amount on this side of the T-account.
Credit side
When cash is received from a sale, the corresponding change to owner's equity is usually recorded here instead of directly in the capital account.
In a separate revenue account (sales account)
A person or an external business to whom a liability is legally owed.
Creditor
This term defines the cost of goods or services used up to operate a business on a day-to-day basis.
Expense
This historical structure, which began construction in the 3rd century BC to protect against invasions, is the longest man-made structure in the world.
Great Wall of China
This is the precise definition of "Owner's Equity."
The amount remaining after the value of all liabilities is subtracted from the value of all assets.
This is the normal balance side of a liability account.
Credit side
True or False: A transaction involving the sale of goods or services results in a net decrease in owner’s equity.
False
When items are purchased with the agreement that they will be paid for at a later, future date.
Buying "on account"
This term describes assets taken out of a business specifically for the owner’s personal use.
Withdrawals (or drawings)
Though it looks like a giant, terrifying tooth, this popular spicy, triangular tortilla chip brand's name actually translates to "little golden things" in Mexican Spanish.
Doritos