Question

Which of the following statements explain(s) how the accounting equation applies to businesses? Check all that apply. A. The equation reflects that the total of what a business owns at any point in time will equal the total of what it owes creditors and owners. B. The equation applies to all transactions. C. The equation states that Revenues - Expenses = Assets. The relation of assets, liabilities and equity is reflected in the equation. D. The equation reflects the fact that, at any point in time, total revenues will always equal total liabilities and assets. E. The equation states that Assets = Liabilities + Equity.

Answer 1

Answer:

A, E

Explanation:

The accounting equation states that Assets is the sum of the company's equity and liabilities where assets are the resources owned by the company. Equity refers to the resource the business owes the owners while liabilities are what the creditors (third parties) are owed by the business or company. These items are the elements that make up a company's balance sheet. For the balance sheet to be balanced;

Asset must equal the total of the liabilities and equity. Hence option A is right as well as E. Option B is not right as there are transactions that may be recorded between some elements of the balance sheet and those of the P/L. For instance, training cost incurred by the business paid with cash is between an asset and an expense. For option C, Revenue - Expense gives profit and not assets. The later part of the option is however true. Option D for the same reason as C is also not true.