Multiple Choice
If an individual has total assets of \$120 and liabilities of \$45, what is the amount of owner's equity according to the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Paying cash for an expense incurred in the same period has what effect on the fundamental accounting equation?
A
Assets increase and equity increases; liabilities remain unchanged.
B
Assets decrease and liabilities decrease; equity remains unchanged.
C
Assets decrease and equity decreases; liabilities remain unchanged.
D
Assets and liabilities both increase; equity remains unchanged.
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.
Analyze the transaction: Paying cash for an expense means cash (an asset) is reduced, and the expense reduces equity because expenses decrease net income, which is part of equity.
Determine the impact on assets: Since cash is being paid, the asset 'Cash' decreases.
Determine the impact on liabilities: The expense is paid immediately, so no liability is created or affected; liabilities remain unchanged.
Determine the impact on equity: Expenses reduce net income, which in turn reduces equity. Therefore, equity decreases.
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