Financial Accounting: The accounting equation — Assets, Liabilities and Equity
What assets, liabilities and equity really are, and how they fit together in the accounting equation.
Financial Accounting · 24 questions
Try 3 questions
1. Which expression is the basic accounting equation?
- Assets = Equity − Liabilities
- Assets = Liabilities + Equity
- Liabilities = Assets + Equity
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Answer: Assets = Liabilities + Equity
Everything a business controls (assets) is financed either by creditors (liabilities) or by owners (equity).
2. Under the IFRS Conceptual Framework, what best describes an asset?
- Any item the company legally owns
- Any cost the company has already paid
- A resource controlled due to past events
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Answer: A resource controlled due to past events
IFRS defines an asset as a present economic resource controlled by the entity as a result of past events; control, not legal title, is the key.
3. Under IFRS 16, a company leasing a machine for five years shows what on its balance sheet?
- Only the yearly rent, as an expense
- A right-of-use asset and a lease liability
- Nothing until the lease term ends
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Answer: A right-of-use asset and a lease liability
IFRS 16 requires lessees to recognize the right to use the asset and the obligation to pay for it, even without owning the machine.
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