Multiple Choice
In the context of the fundamental accounting equation, profit is calculated as the total amount of money made minus which of the following?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following best explains how making payments on a car affects the fundamental accounting equation?
A
Paying for a car reduces assets (cash) and increases liabilities (car loan), keeping the equation balanced.
B
Car payments increase both assets and owner's equity.
C
Paying for a car only affects owner's equity and not assets or liabilities.
D
Making payments on a car reduces liabilities (car loan) and reduces assets (cash), with 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.
Identify the components involved in the transaction: Making payments on a car involves reducing cash (an asset) and reducing the car loan (a liability).
Analyze the impact on assets: When cash is used to make a payment, the cash balance decreases, which reduces the total assets.
Analyze the impact on liabilities: The car loan balance decreases as payments are made, which reduces the total liabilities.
Confirm there is no effect on owner's equity: Since the transaction only affects assets and liabilities, owner's equity remains unchanged, keeping the accounting equation balanced.
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