Question 1

The performance of services for cash increases total assets and total owner's equity.

Accepted Answer

When a company performs services for cash, it increases its cash assets, which in turn increases its total assets. This increase in assets also increases the owner's equity since owner's equity is a combination of the company's assets and liabilities.

Question 2

The effect of an investment by the owner has the opposite impact on the accounting equation of a withdrawal by the owner.

Accepted Answer

An investment by the owner increases the assets and owner's equity, while a withdrawal decreases the assets and owner's equity. Therefore, they have opposite impacts on the accounting equation.

Question 3

The collection of an accounts receivable increases total assets.

Accepted Answer

When accounts receivable is collected, cash increases while accounts receivable decreases by the same amount, leaving total assets unchanged.

Question 4

Owner's drawings are an expense of the business.

Accepted Answer

Owner's drawings are not an expense of the business as they represent the owner's personal withdrawals of funds from the business and do not affect the business's operations or income statement.

Question 5

Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company.

Accepted Answer

Internal transactions do affect the basic accounting equation (Assets = Liabilities + Equity) because they can change the composition of the company's assets, liabilities, or equity, even though they occur entirely within one company.

Question 6

External transactions involve economic events between the company and some other enterprise or party.

Accepted Answer

External transactions refer to economic events or exchanges between a company and other entities outside of the company, such as customers, suppliers, or creditors.

Question 7

Accountants record both internal and external transactions.

Accepted Answer

Accountants record all transactions, whether they are internal, such as salary payments to employees, or external, such as sales to customers or purchases from suppliers.

Question 8

The purchase of office equipment on credit increases total assets and total liabilities.

Accepted Answer

When office equipment is purchased on credit, the total assets increase due to the acquisition of the equipment, but the total liabilities also increase due to the obligation to pay back the credited amount. This results in an increase in both total assets and total liabilities.

Question 9

The purchase of supplies on credit increases total assets and total liabilities.

Accepted Answer

When supplies are purchased on credit, it increases the total assets (inventory) but also increases the total liabilities (accounts payable).

Question 10

Expenses are the costs incurred in the process generating revenue.

Accepted Answer

Expenses are the costs incurred in the process of generating revenue. They include various costs such as salaries, rent, utilities, supplies, and other expenses necessary to operate a business.

Question 11

The withdrawal of cash from the business by the owner decreases assets and owner's equity.

Accepted Answer

Withdrawing cash reduces the amount of cash, which is an asset, and it also reduces the owner's equity because the owner is taking money out of the business.

Question 12

In order to possess future service potential, an asset must have physical substance.

Accepted Answer

An asset can possess future service potential without having physical substance, such as intellectual property, trademarks, and patents.

Question 13

The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.

Accepted Answer

This is the fundamental principle of accounting, also known as the balance sheet equation. It states that Assets = Liabilities + Owner's Equity, meaning that the total value of all assets is equal to the sum of all the claims against those assets. It is important for businesses to maintain this balance in order to accurately represent their financial position.

Question 14

When a company borrows money from the bank, the transaction increases total assets and total liabilities.

Accepted Answer

When a company borrows money from the bank, it receives cash which increase its total assets. However, it also incurs a liability to repay the loan, which increases its total liabilities. Therefore, both total assets and total liabilities increase as a result of the borrowing transaction.

Question 15

The basic accounting equation states that Assets = Liabilities.

Accepted Answer

The basic accounting equation states that Assets = Liabilities + Equity.

Question 16

Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses.

Accepted Answer

Creditors' claims on a business's assets take precedence over the owners' claims because creditors must be paid before equity owners in the event of liquidation or bankruptcy.

Question 17

Both owner investments and revenues increase total assets and owner's equity.

Accepted Answer

Both owner investments and revenues are sources of funds that increase total assets and owner's equity. Owner investments increase owner's equity directly, while revenues increase owner's equity indirectly by increasing net income, which in turn increases retained earnings (a component of owner's equity).

Question 18

The purchase of store equipment for cash reduces assets and owner's equity by equal amounts.

Accepted Answer

When store equipment is purchased for cash, one asset (cash) decreases while another asset (equipment) increases, resulting in no change to owner's equity.

Question 19

The payment of rent expense reduces owner's equity.

Accepted Answer

Rent expense is an expense that reduces the net income and ultimately decreases the owner's equity.

Question 20

Revenues result from the delivery of goods, the performance of services and owner investments.

Accepted Answer

Revenues result from the delivery of goods and the performance of services, but not from owner investments. Owner investments are considered equity transactions, not revenue.

Quiz 2: The Accounting Equation and Transaction Analysis