Multiple Choice
Which of the following is an example of a transaction that affects only one side of the fundamental accounting equation (\(\text{Assets} = \text{Liabilities} + \text{Equity}\))?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following statements correctly represents the fundamental accounting equation?
A
Liabilities = Assets + Equity
B
Assets = Revenues - Expenses
C
Assets = Liabilities + Equity
D
Equity = Assets + Liabilities
Verified step by step guidance1
Step 1: Understand the fundamental accounting equation, which is the foundation of financial accounting. It states that Assets = Liabilities + Equity. This equation ensures that a company's financial position is balanced.
Step 2: Analyze the options provided in the problem. The correct representation of the fundamental accounting equation is 'Assets = Liabilities + Equity'. This equation reflects the relationship between what a company owns (assets), owes (liabilities), and the owner's residual interest (equity).
Step 3: Eliminate incorrect options by comparing them to the fundamental accounting equation. For example, 'Liabilities = Assets + Equity' is incorrect because liabilities are not the sum of assets and equity. Similarly, 'Assets = Revenues - Expenses' is incorrect because revenues and expenses are part of the income statement, not the balance sheet.
Step 4: Confirm that 'Equity = Assets + Liabilities' is also incorrect because equity is calculated as the residual interest after subtracting liabilities from assets, not the sum of assets and liabilities.
Step 5: Conclude that the correct representation of the fundamental accounting equation is 'Assets = Liabilities + Equity', which aligns with the principles of double-entry accounting and ensures the balance sheet remains balanced.
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