Question

part two—analyzing accounting practices
directions: place a t for true or an f for false in the answers column to show whether each of the following statements is true or false.

1. the accounting equation is most often stated as: assets + liabilities = owners equity.
2. after each transaction, the accounting equation must remain in balance.
3. total assets are the amount the owner has invested in the business.
4. when two asset accounts are changed in a transaction, there must be an increase and a decrease.
5. detailed information about changes in owners equity is needed by owners and managers to make sound business decisions.
6. 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.
7. a transaction for the sale of goods or services results in a decrease in owners equity.
8. when financial records for a business and for its owners personal belongings are not mixed, this is an application of the business entity accounting concept.
9. an expense is a decrease in owners equity resulting from the operation of a business.
10. the capital account is the owners liability account.
11. payments for advertising, equipment repairs, utilities, and rent are expense transactions.
12. withdrawals are assets taken out of a business for the owners personal use.
13. the most common type of withdrawal by an owner from a business is the withdrawal of cash.
14. when an owner withdraws cash from the business, the transaction affects both assets and owners equity.
15. a withdrawal is an expense.

Explanation:

1. The correct accounting equation is $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.
2. A core rule of double-entry accounting is that the equation stays balanced after every transaction.
3. Owner's equity, not total assets, is the owner's invested amount.
4. Two asset accounts can both increase (e.g., taking a loan to buy equipment: cash and equipment both rise) or both decrease.
5. Owner's equity changes reflect business performance, critical for decision-making.
6. Buying on account means purchasing goods/services to be paid for later.
7. Sales of goods/services increase revenue, which increases owner's equity.
8. The Business Entity Concept requires separating business and personal finances.
9. Expenses are costs of operations that reduce owner's equity.
10. The capital account is an owner's equity account, not a liability.
11. These payments are all operational costs classified as expenses.
12. Withdrawals are assets removed from the business for personal owner use.
13. Cash is the most frequently withdrawn asset due to its liquidity.
14. Cash (asset) decreases, and owner's equity decreases when cash is withdrawn.
15. Withdrawals are personal distributions, not operational expenses.

Answer:

1. F
2. T
3. F
4. F
5. T
6. T
7. F
8. T
9. T
10. F
11. T
12. T
13. T
14. T
15. F