Question

Sergei has $23000 in assets and $13200 in liabilities. If Sergei used $3000 of his cash to pay off bank loan, how would that impact his owner’s equity? Use the balance sheet equation to illustrate your answer

Answer 1

Assets = Liabilities + Owner's Equity

To know the Owner's Equity, use this formula:
Assets - Liabilities = Owner's Equity
$23,000 - $13,200 = $9,800

Sergei wants to pay his bank loan using his $3,000 cash
*Cash is an Asset and Bank Loan is a Liability, therefore, Sergei needs to deduct $3,000 from the Asset (cash payment) and Liability (bank loan)

Assets: $23,000 - $3,000 = $20,000 (New Assets)
Liabilities: $13,200 - $3,000 = $10,200 (New Liabilities)

To get the Owner's Equity after the payment of bank loan, use this formula: Assets - Liabilities = Owner's Equity
$20,000 - $10,200 = $9,800

There is no changes in the Owner's Equity after the bank loan was paid.