Multiple Choice
Of the following steps of the accounting cycle, which step should be completed first?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following best represents the formula for the fundamental accounting equation?
A
Assets = Liabilities + Equity
B
Equity = Assets - Revenue
C
Assets = Revenue - Expenses
D
Liabilities = Assets + Equity
Verified step by step guidance1
Understand the fundamental accounting equation, which is the cornerstone of financial accounting. It states that a company's assets are financed by liabilities and equity.
The formula for the fundamental accounting equation is: Assets = Liabilities + Equity. This equation ensures that the balance sheet remains balanced.
Analyze the options provided in the problem. The correct formula is Assets = Liabilities + Equity, as it aligns with the fundamental accounting principle.
Review the incorrect options: Equity = Assets - Revenue is not correct because revenue is part of the income statement, not the balance sheet. Assets = Revenue - Expenses is incorrect because it represents net income, not the balance sheet equation. Liabilities = Assets + Equity is incorrect because liabilities and equity together finance assets, not the other way around.
Conclude that the correct representation of the fundamental accounting equation is Assets = Liabilities + Equity, as it reflects the relationship between a company's resources and how they are financed.
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