Question

If, on January 1, Terry Chervinski Company paid $2,000 of its accounts payable in cash, what would be the effect of this transaction on assets, on liabilities, and on equity?

a) Assets increase, liabilities increase, equity decreases
b) Assets decrease, liabilities decrease, equity decreases
c) Assets decrease, liabilities decrease, equity increases
d) Assets decrease, liabilities increase, equity increases

Answer 1

Payment of accounts payable results in a decrease in both assets and liabilities, with no direct impact on equity.

Step-by-step explanation:

If on January 1, Terry Chervinski Company paid $2,000 of its accounts payable in cash, the effect of this transaction on assets, liabilities, and equity would be as follows: Assets decrease, as cash is paid out; liabilities decrease, because the accounts payable are reduced by the amount paid; and equity remains unchanged, as this transaction does not directly affect the company's equity. Therefore, the correct answer is (c) Assets decrease, liabilities decrease, equity remains unchanged.