Top 20 Questions and Answers-Accounting Equation [With PDF]

In accounting, the accounting equation is of immense importance. If you want to understand accounting’s basic concepts first, you need to understand the accounting equation.

So today, we’re going to learn the Top 20 Questions and Answers-Accounting Equation. It’s going to help you get a brief idea of the accounting equation.

So let’s get started.

Questions and Answers- Accounting Equation

Question-01: What is the accounting equation?

Answer: Every transaction has two sides. One side is the giver, and the other side is the receiver, which is for the same amount of money.

Based on this information, one party is debit and the other party is credit. Modern accountants have developed a mathematical formula based on this principle known as the accounting equation.

Questions-02: What is the accounting equation’s basis?

Answer: The basis for the accounting equation is the double-entry system.

Question-03: What is the effect of a transaction with a business?

Answer: The accounting equation is always affected by business transactions.

Question-04: Where is the field of accounting equation used?

Answer: The accounting equation applies to all economic organizations, regardless of size, type of company, or business organization. It is used by both small companies as well as giant corporations.

Question-05: What is the basic accounting equation?

Answer: The basic accounting equation is A=L+OE

Here,

A=Assets

L= Liabilities

OE=Owners Equity

Question-06: What is the fundamental relationship between the basic accounting equations?

Answer: The basic accounting equation’s fundamental relationship is that assets must be equal to the sum of liabilities and the owner’s equity.

Question-07: What is the expanded accounting equation?

Answer: The expanded accounting equation is A = L + (C + R – E – D)

Here,

A= Assets

L= Liabilities

C=Capital

R=Revenue

E=Expenses

D=Drawings

Question-08: What is an asset?

Answer: Asset means the economic resources of a company investing for profit—for example, Land, furniture, buildings, vehicles, machinery, etc.

Question-09: What is a liability?

Answer: Liability refers to the financial responsibility of a business. Businesses must pay such liability after a certain period or in the future.

Question-10: What is the owners’ equity?

Answer: If the third party’s claim is excluded from the business’s net assets, the balance will be known as the owner’s equity. The owner’s ownership over the company’s total assets is known as the owner’s equity.

Question-11: What’s the revenue?

Answer: Revenue represents the increase in ownership of the capital generated through business activities for profit—for example, sales, service, fees, commissions, interest, etc.

Question-12: What are the expenses?

Answer: Expenses are the cost of assets consumed or resources used in the earnings process—for example, salaries and wages, utility expenses, shipping costs, etc.

Question-13: What are the drawings?

Answer: The owner can withdraw cash or other personal assets. For each accounting period, we use a different classification called “drawings” to calculate the total withdrawals. It reduces the equity of the owner.

Question-14: What is the impact of an asset on the accounting equation?

Answer: The impact of the asset on the accounting equation is as follows:

If the total assets increase, the total liabilities or owner’s equity will also increase.
If the total assets decrease, the total liabilities or owner’s equity will also decrease.

As one asset increases, another asset decreases.

Question-15: What is the effect of the liabilities in the accounting equation?

Answer: The effect of the liabilities in the accounting equation is as follows:

If the total liabilities increase, the total assets will also increase.
If the total liabilities decrease, the total assets will also decrease.
As one liability increases, another liability decreases.

Question-16: What is the effect of the owner’s equity in the accounting equation?

Answer: The effect of the owner’s equity in the accounting equation is as follows:

If the owner’s equity increases, total liabilities will decrease.

If the owner’s equity decreases, total liabilities will increase.

Question-17: How does the wealth of the owners increase and decrease?

Answer:

Owner’s equity increases by

The investment of the owner and
Revenue

The owner’s equity decreases by

Owner’s Drawings and
Expenses

Question-18: What is the impact of Income on the accounting equation?

Answer: The effect of Income in the accounting equation is as follows:

If income increases, the owner’s equity will also increase.

If income decreases, the owner’s equity will also decrease.

Question-19: What is the effect of the expense in the accounting equation?

Answer: The effect of the expense in the accounting equation is as follows:

If expenses increase, the owner’s equity will also decrease.
If expenses decrease, the owner’s equity will also increase.

Question-20: What are the owner Investments?

Answer: The owner’s investments are the assets that the owner brings into the company. These investments would increase the wealth of the owner.

At the end of the article, you now have the basic idea of the accounting equation. Read these Top “20” Questions and Answers- Accounting Equation regularly and enhance your accounting knowledge.

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