Practice question · Multiple choice
The accounting equation is called an identity rather than a law. What is the difference, and why does it matter?
Hints
- Ask what equity is, independently of the equation.
- Could a business event make the equation false? What could?
Show the answer
D. An identity is true by construction, not by observation
Why
Equity is the residual, so the equation restates a definition rather than asserting a fact about the world, which is why an imbalance is always a bookkeeping error and never news about the business. The equation has no predictive content, and that is exactly what makes it a reliable check.
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