Multiple Choice
Which of the following best represents the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following statements about the fundamental accounting equation is correct regarding a transaction for the sale of goods or services?
A
It results in a decrease in owner's equity.
B
It results in an increase in owner's equity.
C
It only affects liabilities.
D
It has no effect on owner's equity.
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation must always remain balanced after any transaction.
Analyze the transaction: The sale of goods or services typically generates revenue, which increases the owner's equity through retained earnings.
Recognize the impact of revenue: Revenue increases the owner's equity because it contributes to the net income, which is part of retained earnings in the equity section of the balance sheet.
Consider the other components: The transaction may also affect assets (e.g., cash or accounts receivable) but does not directly affect liabilities unless specified otherwise.
Conclude that the correct statement is: 'It results in an increase in owner's equity,' as revenue from sales directly contributes to the owner's equity.
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