You need to be careful when using the accounting equation because there are two versions of the formula. One is assets – liabilities = equity. The other is assets = liabilities + equity. Keep in mind which version you’re using.

Here are a couple of practice questions to help you get familiar with this formula.

Practice questions

  1. At the end of an accounting period, a company’s total assets equaled $576,000, and liabilities equaled $245,000. How much was the company’s owners’ equity?

  2. The owners of a start�?up invest $1,000,000 into the business. After one year of operations, the business has assets of $850,000 and losses of $300,000. What are the total liabilities at the end of the first year?

Answers and explanations

  1. $331,000

    The basic accounting equation is assets = liabilities + owners’ equity.

    You can always double-check your answer by going back to the original equation assets = liabilities + owners’ equity. In this example, the sum of liabilities of $245,000 and owners’ equity of $331,000 is $576,000. This corresponds to the given amount of total assets, so you know your answer is right.

  2. $150,000

    You need to go back to the basic accounting equation: assets = liabilities + owners’ equity. Step one is to determine total owners’ equity, which has two parts — the investment by owners and the losses that the business experienced during the first year of operations. Investment by owners is $1,000,000. So, the total owners’ equity is $700,000:


    Now you can use the basic accounting equation to calculate total liabilities at the end of the year:


If you need more practice on this and other topics from your accounting course, visit to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.

About This Article

This article is from the book:

About the book authors:

Kenneth Boyd is the owner of St. Louis Test Preparation ( He provides online tutoring in accounting and finance. Kenneth has worked as a CPA, Auditor, Tax Preparer, and College Professor. He is the author of CPA Exam For Dummies. Kate Mooney has been teaching accounting to both undergraduates and MBA students at St. Cloud State University since 1986, after earning her PhD from Texas A & M University. She is a licensed CPA in Minnesota and is a member of the State Board of Accountancy.

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