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ACCA Knowledge Level The Accounting Equation — practice questions

Explore 6 free The Accounting Equation questions in ACCA Knowledge Level Financial Accounting. Open each question or exercise to read its content, reference answers and available explanation.

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The Accounting Equation questions and exercises with answers

Showing questions 1–6 of 6.

What is the accounting equation?Read the answer and worked solution →How do revenue and expense accounts relate to the accounting equation?Read the answer and worked solution →A statement of financial position shows total assets of $60,000 and liabilities of $5,000. What is total equity?Read the answer and worked solution →Which account is NOT listed at all on the statement of financial position?Read the answer and worked solution →Complete the Equation (ACCA FA)Read the answer and worked solution →Fix the Equation (ACCA FA)Read the answer and worked solution →

Worked practice questions

What is the accounting equation?

  1. Assets = Liabilities + Equity
  2. Assets + Liabilities = Equity
  3. Assets = Liabilities − Equity
  4. Revenue = Liabilities + Equity
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Correct answer: A. Assets = Liabilities + Equity

1. The accounting equation is the basis for all transactions and must always be in balance. 2. It states $\text{Assets} = \text{Liabilities} + \text{Equity}$. 3. Assets are funded by outsiders (liabilities) and owners (equity). 4. Options A and C misplace or misuse the terms; option D drops assets entirely. 5. Therefore Assets = Liabilities + Equity. _Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.7 "The Accounting Equation", p.41_

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How do revenue and expense accounts relate to the accounting equation?

  1. They do not affect the equation at all
  2. They affect equity through Retained Earnings
  3. They are listed as liabilities
  4. They reduce total assets directly
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Correct answer: B. They affect equity through Retained Earnings

1. Revenue and expense accounts do not appear directly in the accounting equation. 2. Indirectly, they affect equity by changing the Retained Earnings balance when closed. 3. Closing revenue credit balances increases Retained Earnings; closing expense debit balances decreases it. 4. They are not liabilities (C) and do not directly cut assets (D); they clearly do affect the equation, ruling out A. 5. Therefore they affect equity through Retained Earnings. _Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.7.1 "Accounting Equation Broken Out", p.43_

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A statement of financial position shows total assets of $60,000 and liabilities of $5,000. What is total equity?

  1. $55,000
  2. $65,000
  3. $60,000
  4. $5,000
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Correct answer: A. $55,000

1. The balance sheet expands the equation $\text{Assets} = \text{Liabilities} + \text{Equity}$. 2. Rearrange: $\text{Equity} = \text{Assets} - \text{Liabilities}$. 3. Substitute: $60{,}000 - 5{,}000 = 55{,}000$. 4. Option A adds liabilities instead of subtracting; options C and D repeat input figures. 5. Therefore total equity is $55,000. _Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.7.4 "Balance Sheet", p.45_

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More Financial Accounting topics

Ratio AnalysisStatement of Cash FlowsThe Mechanics of the Accounting ProcessInventory ValuationAsset, Liability and Equity AccountsFinancial StatementsAccounting EquationBonds Payable