CHAPTER 1—STARTING A PROPRIETORSHIP: CHANGES THAT AFFECT THE ACCOUNTING EQUATION

TRUE/FALSE

	1.	The accounting equation is most often stated as: Assets + Liabilities = Owner's Equity.

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	2.	After each transaction, the accounting equation must remain in balance.

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	3.	When two asset accounts are changed in a transaction, there must be an increase and a decrease.

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	4.	Asset accounts are listed on the right side of the accounting equation.

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	5.	When items are bought and paid for at a future date, another way to state this is to say these items are bought on account.

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	6.	When financial records for a business and for its owner's personal belongings are not mixed, this is an application of the Business Entity accounting concept.

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	7.	The accounting equation must be in balance to be correct.

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	8.	The capital account is the owner's liability account.

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	9.	Asset accounts are listed on the left side of the accounting equation.

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	10.	When cash is paid for supplies, assets increase and liabilities decrease.

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	11.	When an account on one side of the accounting equation is increased, there must also be an increase on the other side to keep the equation in balance.

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	12.	Accounting is the language of business.

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	13.	Keeping personal and business records separate is an application of the business entity concept.

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	14.	Assets such as cash and supplies have value because they can be used to acquire other assets or to operate a business.

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	15.	The relationship among assets, liabilities, and owner's equity can be written as an equation.

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	16.	The accounting equation does not have to be in balance to be correct.

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	17.	The sum of the assets and liabilities of a business always equals the investment of the business owner.

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	18.	The capital account is an owner's equity account.

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	19.	If two amounts are recorded on the same side of the accounting equation, the equation will no longer be in balance.

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	20.	When a company pays insurance premiums in advance to an insurer, it records the payment as a liability because the insurer owes future coverage.

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	21.	When cash is paid on account, a liability is increased.

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	22.	A business that performs an activity for a fee is a service business.

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	23.	A proprietorship is also known as a sole proprietorship.

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	24.	Anything of value that is owned is a liability.

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	25.	Assets have value because they can be used to acquire other assets or to operate the business.

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	26.	A business has two types of equities.

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	27.	Individuals or other businesses to which a business owes money have rights to the business's assets.

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	28.	In the United States, business transactions are recorded in U.S. dollars.

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	29.	A record summarizing all the information pertaining to a single item in the accounting equation is an account.

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	30.	The amount in an account is an account balance.

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	31.	When an owner invests cash in a business, owner's equity decreases.

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	32.	The capital account is a liability account.

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	33.	When a business pays cash for insurance, a liability is increased.

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	34.	A decrease in owner's equity because of a withdrawal is a result of the normal operations of a business.

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	35.	A revenue transaction decreases the sum of the balances on the left side of an accounting equation.

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	36.	A transaction for the sale of goods or services results in an increase in owner's equity.

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	37.	A transaction is a normal business activity that changes assets, liabilities, or owner's equity.

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	38.	A transaction that increases accounts receivable and increases owner's equity is a sale on account.

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	39.	A withdrawal is an expense.

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	40.	Revenue from a sale on account should be recorded when the payment is received.

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	41.	Withdrawals are assets taken out of a business for the owner's personal use.

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	42.	Revenue is a decrease in owner's equity resulting from the operation of a business.

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	43.	When a company makes a sale of $300.00, assets and owner's equity increase by $300.00.

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	44.	When cash is paid for expenses, the business has less cash; therefore, the asset account Cash is decreased and the owner's equity account is increased.

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	45.	Regardless of when payment is made when services are sold, the revenue should be recorded at the time of the sale.

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MULTIPLE CHOICE

	1.	Recording and reporting a business's financial information separately from the owner's financial information is an application of the accounting concept ____.
A.	Unit of Measurement	C.	Going Concern	
B.	Business Entity	D.	Separation of Records	

ANS:	B	PTS:	1

	2.	The amount remaining after the value of all liabilities is subtracted from the value of all assets is ____.
A.	the fair market value of the business	
B.	owner's equity	
C.	a financial report	
D.	a transaction	

ANS:	B	PTS:	1

	3.	The accounting equation is most often stated as ____.
A.	Assets = Liabilities	
B.	Cash = Assets	
C.	Assets = Liabilities + Owner's Equity	
D.	Liabilities + Assets = Owner's Equity	

ANS:	C	PTS:	1

	4.	In the United States, recording business transactions in dollars is an application of the accounting concept ____.
A.	Unit of Measurement	C.	Going Concern	
B.	Business Entity	D.	Separation of Records	

ANS:	A	PTS:	1

	5.	The account used to summarize the owner's equity in a business is ____.
A.	equity	C.	capital	
B.	owner's equity	D.	a liability	

ANS:	C	PTS:	1

	6.	If cash is increased by $2,000.00 when the owner invests cash in the business, then capital is ____.
A.	increased by $2,000.00	C.	increased by $1,000.00	
B.	decreased by $2,000.00	D.	not changed	

ANS:	A	PTS:	1

	7.	When a transaction changes both sides of the accounting equation, ____.
A.	an increase on the right side must offset a decrease on the left side	
B.	an increase on the left side must equal an increase on the right side	
C.	neither side of the equation changes	
D.	none of the above	

ANS:	B	PTS:	1

	8.	When a business pays cash for supplies, ____.
A.	liabilities increase	
B.	assets and liabilities increase	
C.	assets and liabilities decrease	
D.	assets increase and assets decrease	

ANS:	D	PTS:	1

	9.	When cash is decreased and supplies are increased by an equal amount, ____.
A.	there is an increase in liabilities	
B.	there is an increase in owner's equity	
C.	there is a decrease in liabilities	
D.	liabilities and capital are not changed	

ANS:	D	PTS:	1

	10.	When a transaction changes only one side of the equation, if one account is increased, the other account on the same side must ____.
A.	increase	C.	not change	
B.	decrease	D.	none of the above	

ANS:	B	PTS:	1

	11.	Prepaid Insurance is ____.
A.	an asset account	C.	an owner's equity account	
B.	a liability account	D.	none of the above	

ANS:	A	PTS:	1

	12.	Buying items and paying for them at a future date is ____.
A.	not recommended	C.	illegal	
B.	not a common business practice	D.	a common business practice	

ANS:	D	PTS:	1

	13.	When a business buys supplies on account, assets ____.
A.	increase	C.	decrease	
B.	increase and liabilities decrease	D.	decrease and liabilities increase	

ANS:	A	PTS:	1

	14.	When supplies are bought on account, the business to whom money is owed is ____.
A.	an asset account	C.	an equity account	
B.	a liability account	D.	a capital account	

ANS:	B	PTS:	1

	15.	When cash is paid on account, ____.
A.	two assets are changed	
B.	one asset and owner's equity are changed	
C.	one liability and owner's equity are changed	
D.	one asset and one liability are changed	

ANS:	D	PTS:	1

	16.	Total assets are $22,000.00. Supplies are bought on account for $1,500.00. The total assets are now ____.
A.	$22,000.00	C.	$20,500.00	
B.	$23,500.00	D.	$25,000.00	

ANS:	B	PTS:	1

	17.	Total assets are $19,500.00. Cash is paid for $1,500.00 of supplies. The total assets are now ____.
A.	$19,500.00	C.	$18,000.00	
B.	$21,000.00	D.	$22,500.00	

ANS:	A	PTS:	1

	18.	To start a business, the owner invested $8,000.00, bought $1,500.00 of supplies, insurance coverage of $500.00, and bought an additional $300.00 of supplies on account. Total assets are ____.
A.	$5,700.00	C.	$8,300.00	
B.	$7,000.00	D.	$6,000.00	

ANS:	C	PTS:	1

	19.	A business has total cash of $30,000.00. Then the business pays $1,000.00 on account, buys insurance coverage of $750.00, buys supplies for $1,200.00, and pays $300.00 more on account. The balance of the cash account is now ____.
A.	$25,750.00	C.	$28,700.00	
B.	$26,750.00	D.	none of the above	

ANS:	B	PTS:	1

	20.	A business has total assets of $30,000.00. Then the business pays $1,000.00 on account, buys insurance coverage of $750.00, buys supplies for $1,200.00, and pays $300.00 more on account. Total assets are now ____.
A.	$25,750.00	C.	$28,700.00	
B.	$26,750.00	D.	none of the above	

ANS:	C	PTS:	1

	21.	A transaction that increases accounts receivable and increases owner's equity is ____.
A.	revenue	C.	expense	
B.	withdrawal	D.	none of the above	

ANS:	A	PTS:	1

	22.	A transaction that increases cash and decreases owner's equity is ____.
A.	revenue	C.	expense	
B.	withdrawal	D.	none of the above	

ANS:	D	PTS:	1

	23.	Cash is increased by ____.
A.	withdrawals	C.	revenue	
B.	expenses	D.	none of the above	

ANS:	C	PTS:	1

	24.	The asset most commonly withdrawn by business owners is ____.
A.	insurance	C.	cash	
B.	supplies	D.	contributions	

ANS:	C	PTS:	1

	25.	A decrease in owner's equity resulting from the operation of a business is ____.
A.	a withdrawal	C.	revenue	
B.	an expense	D.	none of the above	

ANS:	B	PTS:	1