A business pays Rs. 25,000 to a trade creditor in cash. What is the immediate effect on the accounting equation?
Correct answer: D. Assets and liabilities both decrease
- A. Assets increase and liabilities decrease
- B. Assets and equity both decrease
- C. Liabilities and equity both decrease
- D. Assets and liabilities both decrease
Explanation
Cash, an asset, decreases by Rs. 25,000, while the amount owed to the creditor, a liability, also decreases by the same amount. The transaction does not directly change equity.
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Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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