Question

Smith Company pays $3,000 cash for Rent Expense. What is the effect on the accounting equation? O A. Cash decreases by $3,000 and Equity decreases by $3,000. O B. Cash decreases by $3,000 and Accounts Payable decreases by $3,000. O c. Cash decreases by $3,000 and Service Revenue decreases by $3,000. O D. The amount of total assets remains the same. Click to select your answer.

Answer 1

Answer :

Smith company pays $3000 cash for rent expense. Effect on accounting equation:

B . Cash decreases by $ 3,000 and accounts payable decreases by $ 3,000.

Let see the impact below :

The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet. The equation is as follows:

Assets = Liabilities + Shareholder’s Equity

Decrease in cash ($3,000) = Decrease in asset

Decrease in accounts payable - rent ($3,000) = Decrease in Liabilities

Shareholders's Equity = No impact

Thus right hand side impact is equal to left hand side, as it should be to balance the accounting equation.

Explanation of the answer :

The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet. The equation is as follows:

Assets = Liabilities + Shareholder’s Equity

This equation sets the foundation of double-entry accounting and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affects both sides of the accounting equation. For every change to an asset account, there must be an equal change to a related liability or shareholder’s equity account. It is important to keep the accounting equation in mind when performing journal entries.

The balance sheet is broken down into three major sections and their various underlying items: Assets, Liabilities, and Shareholder’s Equity.

Below are some examples of items that fall under each section:

• Assets: Cash, Accounts Receivable, Inventory, Equipment
• Liabilities: Accounts Payable, Short-term borrowings, Long-term Debt
• Shareholder’s Equity: Share Capital, Retained Earnings

The accounting equation shows the relationship between these items.

Rearranging the Accounting Equation : The accounting equation can also be rearranged into the following form:

Shareholder’s Equity = Assets – Liabilities

In this form, it is easier to highlight the relationship between shareholder’s equity and debt (liabilities). As you can see, shareholder’s equity is the remainder after liabilities have been subtracted from assets. This is because creditors parties that lend money have the first claim to a company’s assets.

For example, if a company becomes bankrupt, its assets are sold and these funds are used to settle debts first. Only after debts are settled are shareholders entitled to any of the company’s assets to attempt to recover their investments. Regardless of how the accounting equation is represented, it is important to remember that the equation must always balance. For every transaction, both sides of this equation must have an equal net effect.