Given the following list of accounts, identify which are classified as assets. -Accounts Receivable -Building -Supplies -Cash -Land Which of the following statements below lists the tiles of entering transactions into the accounting equation?
The Correct Answer and Explanation is :
Identifying Asset Accounts:
Among the provided list of accounts:
- Accounts Receivable: Represents money owed to the company by customers; classified as an asset.
- Building: Physical property owned by the company; classified as an asset.
- Supplies: Consumables used in operations; classified as an asset.
- Cash: Money available for immediate use; classified as an asset.
- Land: Real estate owned by the company; classified as an asset.
All five accounts—Accounts Receivable, Building, Supplies, Cash, and Land—are classified as assets.
Understanding the Accounting Equation:
The accounting equation is fundamental to the double-entry bookkeeping system and ensures that a company’s financial statements are balanced. It is expressed as:
Assets = Liabilities + Equity
Where:
- Assets: Resources owned by the company that provide future economic benefits.
- Liabilities: Obligations the company owes to external parties.
- Equity: The residual interest in the assets after deducting liabilities; also known as owner’s equity or shareholders’ equity.
Role of the Accounting Equation in Recording Transactions:
Every financial transaction affects at least two accounts, maintaining the balance of the accounting equation. For example:
- Purchasing Supplies with Cash: If a company buys $500 worth of supplies and pays cash, both assets are affected. Supplies (an asset) increase by $500, and Cash (another asset) decreases by $500. The equation remains balanced: Assets ($500 increase in Supplies and $500 decrease in Cash) = Liabilities + Equity
- Taking a Loan: If a company borrows $10,000 from a bank, Cash (an asset) increases by $10,000, and Loans Payable (a liability) increases by $10,000. The equation remains balanced: Assets ($10,000 increase in Cash) = Liabilities ($10,000 increase in Loans Payable) + Equity
Conclusion:
The accounting equation serves as the foundation for recording and analyzing financial transactions. It ensures that every transaction maintains the balance between assets, liabilities, and equity, providing a clear and accurate picture of a company’s financial position.
For a visual explanation, you might find this video helpful: