when recording transactions into the accounting equation, which of the following statements are correct?
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:
Let’s go through some statements that could be related to this concept and identify whether they are correct:
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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.
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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.
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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).
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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.
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Expenses decrease liabilities.
- Explanation: Incorrect. Expenses decrease owner’s equity because they reduce net income, which ultimately affects retained earnings.
Solution By Steps:
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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.
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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.
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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.