Accounting Equation | Answers

Identify whether each item is an Asset, Liability, or Equity

Bank loan
➛ Liability

Cash
➛ Asset

Owner’s investment
➛ Equity

Inventory
➛ Asset

Amount owed to suppliers
➛ Liability

You buy a computer for $600 cash.
➛ Assets swap | Cash ↓, Equipment ↑ |, equation stays balanced.

You take a bank loan of $2,000.
➛ Assets ↑ and Liabilities ↑

You earn $150 from selling products.
➛ Assets ↑ and Equity ↑ | profit increases equity.

The owner adds $1,000 more to the business.
➛ Assets ↑ and Equity ↑ | owner’s capital increases.

Write the accounting equation.
➛ Assets = Liabilities + Equity

What happens to equity when the business makes a profit?
➛ Equity increases.

Why must the accounting equation always balance?
➛ Because every transaction affects at least two accounts, and accounting is based on balance.

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