When recording transactions into the accounting equation, which of the following statements are correct?

General
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when recording transactions into the accounting equation, which of the following statements are correct?

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When recording transactions into the accounting equation, which of the following statements are correct?

Answer:

Recording transactions into the accounting equation involves maintaining the balance between assets, liabilities, and equity. The accounting equation is given by:

\text{Assets} = \text{Liabilities} + \text{Owner's Equity}

Let’s go through some statements that could be related to this concept and identify whether they are correct:

  1. Each transaction affects two or more accounts.

    • Explanation: This is correct. Accounting follows the double-entry system, which means each transaction will affect at least two accounts to maintain the balance in the accounting equation.

  2. The accounting equation must always remain balanced after each transaction.

    • Explanation: Correct. After recording all transactions, the accounting equation must still hold true; the total assets must equal the sum of liabilities and owner’s equity.

  3. A transaction only affects either the asset or the liability side of the equation, but not both.

    • Explanation: Incorrect. Transactions can affect both sides. For example, purchasing equipment with cash decreases cash (asset) and increases equipment (asset).

  4. Recording a revenue increases both the asset and owner’s equity.

    • Explanation: Correct. When revenue is earned, typically cash (or accounts receivable) increases, and owner’s equity (retained earnings) also increases.

  5. Expenses decrease liabilities.

    • Explanation: Incorrect. Expenses decrease owner’s equity because they reduce net income, which ultimately affects retained earnings.

Solution By Steps:

  1. Understand Double-Entry Accounting:

    • Every transaction impacts at least two accounts, and total debits must equal total credits to maintain the balance in the equation.

  2. Ensure Balance of the Equation:

    • For every transaction, check if the accounting equation remains balanced. If an asset increases, there should be a corresponding increase in liabilities or equity, or a decrease in another asset.

  3. Correctly Classify Transactions:

    • Identify whether transactions result in an increase/decrease in assets, liabilities, or equity to ensure accurate reflection in the accounts.

By applying these principles, you can determine whether statements about transactions affecting the accounting equation are correct.