Accounting Equation

Question 1

What is the accounting equation?

Answer 1

The accounting equation is A = L + OE, where A is Assets, L is Liabilities, and OE is Owner’s Equity.

Question 2

What does OE stand for in the accounting equation?

Answer 2

OE stands for Owner’s Equity.

Question 3

What is the formula for Owner’s Equity?

Answer 3

Owner’s Equity = Capital + Incomes - Expenses - Drawings.

Question 4

What happens to drawings and expenses in the accounting equation?

Answer 4

Drawings and expenses decrease Owner’s Equity.

Question 5

What is the extended accounting equation?

Answer 5

Assets = Capital + Incomes - Expenses - Drawings + Liabilities.

Question 6

What do the signs change in the accounting equation?

Answer 6

Change (-) signs to (+) signs for expenses and drawings.

Question 7

What does the left-hand side of the equation represent?

Answer 7

The left-hand side shows what you have done with the money.

Question 8

What does the right-hand side of the equation represent?

Answer 8

The right-hand side tells you where the money came from to run the business.

Question 9

What is the relationship between capital, income, and liabilities?

Answer 9

Capital + Income = Liabilities + Owner’s Equity.