Question

15. What type of transaction is a cash payment to creditors? How does this type of transaction affect the accounting equation?

Answer 1

Explanation:

When cash is paid to creditors we are reducing our liability portion of creditors by an amount equal to the reduction in the assets column in cash.

i.e. entry would be

Creditors Dr. xxxx

To cash XXXX

Thus liability would be reduced by an amount equal to the decrease in asset value thus keeping capital in tact

Accounting equation would be

Original assets - xxxx = Original liability -xxxx +capital