Question

Sergei has $23 000 in assets and $13 200 in liabilities. If Sergei used $3000 of his cash to pay off his bank loan, how would that impact his owner's equity? Use the balance sheet equation to illustrate your answer.

Answer 1

Balance sheet equation states:

Assets (A) = Liabilities (L) + Owners equity (E)

Before paying the loan,
E = 23000-13200 = $9,800

After paying the loan in cash,
E= 23000-13200-3000 = $6,800

Therefore, paying own's loan reduces owners equity by $3,000.