Question

Which of the following is/are correct regarding the accounting equation and the double-entry system of recording journal entries?

1) The accounting equation is represented by Assets + Liabilities = Owner's Equity.
2) Debit or credit entries affect three or more accounts in the assets, liabilities, and owner's equity, excluding the temporary accounts.
3) The dollar amount of the debits entered in all the related accounts must be equal to the total dollar amount of the credits.
4) All of the choices are correct.

Answer 1

Only Statement 3, stating that the total dollar amount of debits must equal the total dollar amount of credits, is correct. The accounting equation should be Assets = Liabilities + Owner's Equity, and the double-entry system usually involves only two accounts, not three or more, including temporary accounts.

Step-by-step explanation:

Of the statements given regarding the accounting equation and the double-entry system of recording journal entries, the correct ones are:

Therefore, Statement 4 is incorrect because not all the given choices are correct.

When considering a bank's T-account, the assets include financial instruments such as reserves, loans made, and government securities. Liabilities include customer deposits. The net worth, or equity, of the bank is calculated as total assets minus total liabilities and is included on the liabilities side to ensure that assets equal liabilities plus net worth. For a healthy bank, net worth is positive, whereas for a bankrupt bank, net worth would be negative.