A business pays Rs. 25,000 to a supplier against an amount previously owed. What is the effect on the accounting equation?
Correct answer: D. Assets decrease and liabilities decrease
- A. Assets decrease and equity increases
- B. Assets increase and equity decreases
- C. Liabilities increase and equity decreases
- D. Assets decrease and liabilities decrease
Explanation
Cash, an asset, decreases when the supplier is paid, while the payable, a liability, also decreases. Owner's equity is not directly affected by settling an existing liability.
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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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