Accounting Online Program Certification Practice Test

What is the accounting equation represented as?

1. Assets + Liabilities = Equity

2. Assets - Liabilities = Equity

3. Assets - Liabilities - Capital = Profit

4. Assets - Liabilities - Opening Capital + Drawings = Profit

The correct answer is: Assets - Liabilities - Opening Capital + Drawings = Profit

The accounting equation is a fundamental principle of accounting that establishes the relationship between a company's assets, liabilities, and equity. It is typically expressed as Assets = Liabilities + Equity. This means that the total assets of a business are financed either through debt (liabilities) or through the owner's equity. The correct representation of the accounting equation is best captured by the formula: Assets - Liabilities = Equity. In this formula, equity is regarded as the residual interest in the assets of the entity after deducting liabilities. This is foundational to understanding how resources are financed in a business, helping to illustrate the balance that must exist within a company's financial statements. The other options presented delve into aspects of calculating profit or specific accounting entries rather than articulating the core accounting equation itself. Thus, the best representation succinctly indicates how assets, liabilities, and equity interrelate, demonstrating the basic accounting framework that governs financial accounting practices.