The Accounting Equation (Copy)
Topic 1.2: The Accounting Equation – Quiz
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. What is the accounting equation?
A. Assets = Liabilities + Capital
B. Liabilities = Assets + Capital
C. Assets = Capital – Liabilities
D. Capital = Liabilities – Assets
2. Which of the following best defines an asset?
A. The amount owed to suppliers
B. Items used to run the business
C. Amounts received from sales
D. Profits from trading
3. What are liabilities?
A. Items owned by the business
B. Items owed by the business to others
C. Profits not yet distributed
D. Cash in hand
4. Capital in accounting refers to:
A. Money borrowed from banks
B. Assets owned
C. Owner’s investment in the business
D. Amounts owed by debtors
5. A business has assets of $50,000 and liabilities of $20,000. What is the capital?
A. $30,000
B. $70,000
C. $20,000
D. $50,000
6. What happens to the accounting equation if the business purchases equipment for cash?
A. Assets increase, capital increases
B. One asset increases, another decreases
C. Liabilities increase
D. Capital decreases
7. A liability can best be described as:
A. A resource owned by the business
B. A debt the business owes
C. A customer who owes money
D. Profit earned
8. Which of the following would increase both assets and liabilities?
A. Purchase of goods for cash
B. Owner investing cash
C. Taking a bank loan
D. Paying rent
9. If the owner withdraws cash for personal use, what is affected?
A. Liabilities increase
B. Assets and capital decrease
C. Assets increase
D. Liabilities and capital increase
10. A business receives $2,000 cash from a customer. What changes in the accounting equation?
A. Capital increases, assets decrease
B. Asset increases, no other change
C. Asset increases, liability decreases
D. One asset increases, another decreases
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
11. What is the effect on the equation if a creditor is paid in cash?
A. Assets increase, liabilities increase
B. One asset decreases, one liability decreases
C. Capital decreases
D. Liabilities increase
12. What happens when inventory is purchased on credit?
A. Assets increase, liabilities increase
B. Assets decrease, liabilities increase
C. Liabilities decrease
D. Capital increases
13. Which of the following is an example of an asset?
A. Loan from bank
B. Rent owed to landlord
C. Cash in hand
D. Amounts due to suppliers
14. If the business takes out a loan, which two elements increase?
A. Assets and capital
B. Assets and liabilities
C. Liabilities and expenses
D. Capital and expenses
15. What does the accounting equation always ensure?
A. Profit is recorded
B. Financial statements are created
C. Debits equal credits
D. Assets equal liabilities plus capital
16. A business has liabilities of $10,000 and capital of $60,000. What is the total value of assets?
A. $50,000
B. $60,000
C. $10,000
D. $70,000
17. If a business pays $1,000 cash to a supplier, what is the effect?
A. Assets and liabilities both decrease
B. Assets increase
C. Liabilities increase
D. Capital increases
18. Which of the following is not a component of the accounting equation?
A. Assets
B. Income
C. Liabilities
D. Capital
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
19. A business starts with $5,000 cash from the owner. What is the correct effect on the accounting equation?
A. Increase assets and liabilities
B. Increase assets and capital
C. Increase liabilities only
D. Decrease assets, increase capital
20. What is the effect of buying a vehicle with cash?
A. Assets increase, liabilities increase
B. One asset increases, one asset decreases
C. Liabilities increase
D. Capital increases
21. The correct accounting equation is:
A. Assets = Income – Expenses
B. Liabilities = Capital – Assets
C. Capital = Assets – Liabilities
D. Capital = Liabilities + Income
22. If the capital increases, what does it imply?
A. Liabilities increased
B. Assets decreased
C. Owner invested more or profits increased
D. Owner withdrew cash
23. If assets are $80,000 and capital is $50,000, what are the liabilities?
A. $30,000
B. $130,000
C. $50,000
D. $20,000
24. Which of the following transactions does NOT affect the capital?
A. Profit earned
B. Cash introduced by owner
C. Owner takes goods for personal use
D. Buying goods for resale on credit
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
25. Which of the following increases capital?
A. Owner’s drawings
B. Additional investment
C. Purchase of machinery
D. Payment to creditors
26. Which of the following decreases capital?
A. Business makes profit
B. Owner invests money
C. Owner withdraws cash
D. Business receives a loan
27. Which of the following keeps the accounting equation in balance?
A. Paying cash for expenses
B. Recording only income
C. Ignoring liabilities
D. Recording sales but not cost of goods
28. If a business buys goods on credit for $5,000, what is the immediate effect?
A. Increase assets and decrease capital
B. Increase assets and increase liabilities
C. Increase liabilities and decrease assets
D. No change in the equation
29. What is the capital if assets = $90,000 and liabilities = $20,000?
A. $110,000
B. $70,000
C. $20,000
D. $90,000
30. If the business earns a profit and retains it, which part of the equation increases?
A. Liabilities
B. Assets
C. Capital
D. Drawings
Answer key and explanations
Topic 1.2 – The Accounting Equation
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. Correct Answer: A
Explanation: The fundamental accounting equation is:
Assets = Liabilities + Capital
2. Correct Answer: B
Explanation: Assets are resources the business owns or controls to produce value—like equipment, inventory, or cash.
3. Correct Answer: B
Explanation: Liabilities are obligations the business owes to external parties—e.g. loans, accounts payable.
4. Correct Answer: C
Explanation: Capital is the amount the owner has invested in the business, including retained profit.
5. Correct Answer: A
Explanation: Using the equation:
Assets – Liabilities = Capital → 50,000 – 20,000 = 30,000
6. Correct Answer: B
Explanation: Cash decreases and equipment (another asset) increases; no effect on total assets or capital.
7. Correct Answer: B
Explanation: A liability is an obligation or debt the business must pay—e.g. loans or unpaid bills.
8. Correct Answer: C
Explanation: A bank loan increases cash (asset) and loan payable (liability).
9. Correct Answer: B
Explanation: Drawings reduce both cash (asset) and capital (owner’s equity).
10. Correct Answer: B
Explanation: Receiving money from a customer increases cash; another asset (e.g. debtors) decreases or no other element changes.
11. Correct Answer: B
Explanation: Paying creditors with cash reduces both liabilities and assets.
12. Correct Answer: A
Explanation: Inventory increases (asset); amount owed to supplier increases (liability).
13. Correct Answer: C
Explanation: Cash in hand is an asset—it is a resource controlled by the business.
14. Correct Answer: B
Explanation: Taking a loan increases both bank (asset) and liabilities (loan payable).
15. Correct Answer: D
Explanation: The accounting equation ensures the equality:
Assets = Liabilities + Capital
16. Correct Answer: D
Explanation: Using the equation:
Assets = Liabilities + Capital → 10,000 + 60,000 = 70,000
17. Correct Answer: A
Explanation: Paying supplier in cash reduces both asset (cash) and liability (creditor).
18. Correct Answer: B
Explanation: Income is a component of profit, not the basic accounting equation.
19. Correct Answer: B
Explanation: When the owner introduces cash, assets and capital both increase equally.
20. Correct Answer: B
Explanation: Vehicle (asset) increases; cash (asset) decreases—no effect on liabilities or capital.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
21. Correct Answer: C
Explanation: Capital = Assets – Liabilities → This rearranged form is also correct and derived from the main equation.
22. Correct Answer: C
Explanation: Capital increases due to more owner investment or profit earned and retained in the business.
23. Correct Answer: A
Explanation: Liabilities = Assets – Capital → 80,000 – 50,000 = 30,000
24. Correct Answer: D
Explanation: Buying goods on credit affects assets (inventory) and liabilities but not capital.
25. Correct Answer: B
Explanation: Additional investment directly increases capital.
26. Correct Answer: C
Explanation: Drawings (cash withdrawn by owner) reduce capital.
27. Correct Answer: A
Explanation: Every transaction must keep the equation balanced—paying expenses reduces both assets and capital.
28. Correct Answer: B
Explanation: Inventory (asset) increases; amount payable to supplier (liability) increases.
29. Correct Answer: B
Explanation: Using equation:
Capital = Assets – Liabilities → 90,000 – 20,000 = 70,000
30. Correct Answer: C
Explanation: Profits retained in the business increase the capital (owner’s equity).
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course