Financial Accounting: The accounting equation — How Transactions Affect the Equation
How everyday business transactions move assets, liabilities and equity while the equation stays in balance.
Financial Accounting · 23 questions
Try 3 questions
1. A company buys equipment for 5,000 in cash. What happens to total assets?
- They rise by 5,000
- They stay the same
- They fall by 5,000
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Answer: They stay the same
One asset (equipment) rises and another (cash) falls by the same amount, so the total doesn't change.
2. A company buys equipment for 5,000 on credit. How does the equation change?
- Assets and liabilities rise by 5,000
- Assets and equity rise by 5,000
- Nothing changes until it pays
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Answer: Assets and liabilities rise by 5,000
The company gains an asset and an obligation to the seller at the same time, so both sides grow by 5,000.
3. A company pays a supplier 2,000 it already owed. What is the effect?
- Liabilities fall, equity rises
- Assets and liabilities both fall
- Assets and equity both fall
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Answer: Assets and liabilities both fall
Cash goes down and the debt to the supplier disappears; no income or expense arises, so equity is untouched.
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