The Accounting Equation — Practice Questions
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.
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?
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
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.
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:
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