4. Assume Gucci paid expenses totaling P35,000. How does this transaction affect Gucci's accounting equation?*a. Decreases both assetsf and owner's equityb. Decreases assets and increases liabilitiesc. Increases both assets and owner's equityd. increases assets and decrease liabilities
Question
4. Assume Gucci paid expenses totaling P35,000. How does this transaction affect Gucci's accounting equation?*a. Decreases both assetsf and owner's equityb. Decreases assets and increases liabilitiesc. Increases both assets and owner's equityd. increases assets and decrease liabilities
Solution
The correct answer is a. Decreases both assets and owner's equity.
Here's the step by step explanation:
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Gucci paid expenses totaling P35,000. This means that the company's cash (which is an asset) decreased by P35,000.
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In accounting, expenses are recorded as a decrease in owner's equity. This is because expenses are costs used to produce revenue, and when expenses increase, net income decreases. Net income is part of owner's equity, so a decrease in net income results in a decrease in owner's equity.
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Therefore, this transaction decreases both assets (because cash was used to pay the expenses) and owner's equity (because expenses are a decrease in owner's equity).
So, the accounting equation (Assets = Liabilities + Owner's Equity) is affected as both the assets and the owner's equity decrease.
Similar Questions
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