Multiple Choice
Which sequence correctly summarizes the accounting process according to the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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When a company exchanges one asset for another asset of equal value, what is the effect on owner's equity according to the fundamental accounting equation?
A
Owner's equity is eliminated.
B
Owner's equity increases.
C
Owner's equity remains unchanged.
D
Owner's equity decreases.
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation must always remain balanced.
Recognize that exchanging one asset for another asset of equal value does not affect the total value of assets. The company is simply replacing one asset with another of the same worth.
Since the total value of assets remains unchanged, there is no impact on liabilities or owner's equity. Both sides of the equation remain balanced.
Owner's equity represents the residual interest in the assets of the company after deducting liabilities. If assets and liabilities are unaffected, owner's equity remains unchanged.
Conclude that the exchange of assets of equal value has no effect on owner's equity, as it does not alter the overall financial position of the company.
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