Assume that Gucci sold watches for P50,000 to a department store on account. How would this transaction affect Gucci's accounting equation?*a. No effect on the accounting equationb. increase in both assets and liabilities by P50,000c. increase both assets and owner's equity by P50,000d. increase both liabilities and owner's equity by P50,000
Question
Assume that Gucci sold watches for P50,000 to a department store on account. How would this transaction affect Gucci's accounting equation?*a. No effect on the accounting equationb. increase in both assets and liabilities by P50,000c. increase both assets and owner's equity by P50,000d. increase both liabilities and owner's equity by P50,000
Solution
The accounting equation is: Assets = Liabilities + Owner's Equity.
In this case, Gucci sold watches to a department store on account. This means that the department store will pay Gucci in the future. This is considered an account receivable for Gucci, which is an asset.
So, Gucci's assets increase by P50,000 due to the increase in accounts receivable.
At the same time, this sale increases Gucci's owner's equity because revenue increases owner's equity and selling watches is a revenue for Gucci.
So, Gucci's owner's equity also increases by P50,000.
Therefore, the correct answer is c. increase both assets and owner's equity by P50,000.
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