Johan"s plant nursery pays the salaries of it's two employees how will this transaction affect the accounting equation
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To understand how this transaction affects the accounting equation, let's review what the accounting equation represents:
The accounting equation is:
Assets = Liabilities + Equity
In this case, Johan's plant nursery paying salaries to its two employees will impact two components of the equation: Assets and Equity.
1. Assets:
When the nursery pays salaries, it reduces the cash or bank balance in the Assets section. Salaries are typically paid in cash or through transfers from the business bank account, so the nursery's cash (an asset) will decrease by the amount of the salaries paid.
2. Equity:
Paying salaries also affects Equity. Equity represents the business owner's or owners' claim on the assets of the business. When the nursery pays salaries, it's reducing its equity because it's utilizing the company's earnings to compensate employees. This reduction in equity represents the outgoing funds for salaries and reduces the owner's claim to those funds.
Therefore, the transaction of paying salaries will decrease both the Assets (cash or bank balance) and Equity (owner's claim) sides of the accounting equation.