Federal Nursing Home Administrator Practice Exam

According to accounting principles, how can the accounting equation be stated?

1. Assets = Revenue + Expenditures

2. Assets = Liabilities + Capital

3. Assets = Accounts Receivable + Cash

4. Assets = Owner's Equity + Debt

The correct answer is: Assets = Liabilities + Capital

The accounting equation is foundational to the field of accounting and establishes the relationship between a business’s assets, liabilities, and equity. The correct formulation of the accounting equation is that assets equal liabilities plus equity (or capital). This means that everything a company owns (its assets) is financed either by borrowing money (liabilities) or through the owner’s investment (equity). When considering the integrity of a business’s financial structure, this equation guarantees that all resources are accounted for in terms of how they were obtained—either through financial debts (liabilities) or investments made by owners (equity). The other options do not accurately reflect this fundamental principle of accounting. For instance, the first option mixes revenues and expenditures with assets, which doesn't align with how assets are financed. The third option incorrectly focuses solely on specific asset accounts like accounts receivable and cash, without addressing liabilities or equity. Similarly, the fourth option introduces terms like "debt," which can be a part of liabilities but does not represent the overall equity portion appropriately. This clarifies why the chosen answer correctly represents the standard accounting equation.