The Accounting Equation
13 important questions on The Accounting Equation
What are two ways that funds can be invested into a business to finance its operations which include borrowing and net fund use into a business?
- Liabilities
- Equity
After reading and understanding that Equity is the residual value of an entity’s assets after deducting all its liabilities and understanding Equity = Assets - Liabilities, what else does Equity equal?
List how Liabilities and Owner's Equity use funds that can be invested into a business to finance its operations.
- Liabilities - Borrowing money from third - party lenders (banks)
- Equity - Use net funds invested into the business by its owners
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What are Capital Contributions, bearing in mind that Capital means funds raised to support a business and Contribution means Funds given to a business?
(List them in order) What would a Sole Proprietorship, a Partnership and a Corporation call Capital Contributions?
(Remember that Capital Contributions are about the Owner's contribution or investment into the business.)
- Owner's Equity
- Partner Contributions
- Shareholder's Equity
In terms of the three structures of the business, give a personal answer for a Sole Proprietorship, a Partnership and a Corporation.
- Sole Proprietorship = Doing in alone
- Partnership = 50/50 Split with partner
- Corporation = Entity owned by shareholders
What would a Sole Proprietorship, a Partnership and a Corporation call Withdrawals? Can you remember what term it would be defined as for each when an owner wants to take out or withdraw money from the business?
- Sole Proprietorship = Drawings
- Partnership = Partner Drawings
- Corporation = Dividends
GIVE ME THREE types of Liabilities. The first two reflect and follow Assets.
- Current Liabilities
- Non - Current Liabilities
- Contingent Liabilties
Can you give me three examples of Current Liabilities?
Keep in mind current liabilities are business' obligations that need to be settled within a year.
- Accounts Payable
- Salaries Payable
- Taxes Payable
Can you give me three examples of Non-Current Liabilities?
Keep in mind Non-Current means that a business wants to raise money from outside to fund its operations or invest in new assets.
- Long-Term Loans
- Mortgages
- Deferred Income Tax
Even though Contingent Liabilities is less common, could you tell me what it means?
Keep in mind "If the outcome of the litigation is probable and can be reasonably estimated, then the contingent liability should be recorded as a loss on the income statement and a liability on the balance sheet."
- A potential obligation that may arise depending on the outcome of an uncertain future event.
Assets are what?
"This is what businesses _______________ to operate and generate a profit!"
- own and use
"Liabilities are _____ arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
- probable future sacrifices of economic benefits
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