The general manager of a business encounters many different types of business transactions. Provide an example of a transaction that would describe the effect on the accounting equation. Each situation is independent of the other situations.
a. The transaction would increase an asset account and increase a liability account.
b. The transaction would decrease an asset account and decrease the owner�s equity account.
c. The transaction would increase an asset account and increase owner�s equity account.
d. The transaction would decrease an asset account and decrease a liability account.
e. The transaction would increase one asset account and decrease another asset account.
f. The transaction would decrease one liability account and increase another liability account.
To determine the effect of a transaction on the accounting equation, you need to understand the basic accounting equation, which is:
Assets = Liabilities + Owner's Equity
Now, let's go through each option to find an example of a transaction that aligns with the given effect on the accounting equation:
a. The transaction would increase an asset account and increase a liability account.
Example: A business purchases inventory on credit. It increases the Inventory asset account and increases the Accounts Payable liability account.
b. The transaction would decrease an asset account and decrease the owner's equity account.
Example: The business owner withdraws cash for personal use. It decreases the Cash asset account and decreases the Owner's Drawings (or Withdrawals) account, which is a sub-account of Owner's Equity.
c. The transaction would increase an asset account and increase owner's equity account.
Example: The business owner invests additional cash into the business. It increases both the Cash asset account and the Owner's Capital account, which is a component of Owner's Equity.
d. The transaction would decrease an asset account and decrease a liability account.
Example: The business pays off a portion of its outstanding loan. It decreases the Cash asset account (used to make the payment) and decreases the Loans Payable liability account.
e. The transaction would increase one asset account and decrease another asset account.
Example: The business sells old inventory for cash. It increases the Cash asset account and decreases the Inventory asset account.
f. The transaction would decrease one liability account and increase another liability account.
Example: The business refinances its current short-term loan with a long-term loan. It decreases the Short-term Loans Payable liability account and increases the Long-term Loans Payable liability account.
Remember, these examples are just to illustrate the concept, and real-life transactions can vary significantly depending on the nature of the business.