A business earns a profit and retains it in the business. What is the immediate effect on the accounting equation?
Correct answer: D. Assets and owner's equity increase
- A. Assets and owner's equity decrease
- B. Assets and liabilities increase
- C. Liabilities and owner's equity decrease
- D. Assets and owner's equity increase
Explanation
Retained profit increases the resources of the business and becomes part of owner's equity. It does not create a liability merely because the profit remains in the business.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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