Final answer:
It is false that when cash is paid for expenses, the business has more equity. Paying expenses in cash reduces the assets and, given no change in liabilities, this results in a reduction of equity.
Step-by-step explanation:
The statement that when cash is paid for expenses, the business has more equity is false. When a business pays for expenses in cash, its assets decrease because there is an outflow of cash. Consequently, assuming there is no change in liabilities, owners' equity would decrease as well. Owners' equity is calculated as the residual interest in the assets of the enterprise after deducting liabilities, according to the accounting equation: Equity = Assets - Liabilities. Paying expenses results in a decrease in assets without a corresponding reduction in liabilities, thus reducing equity.
For example, if a business has $1000 in assets, including cash, and it pays $200 for rent, the assets are now $800. There are no new liabilities, so the equity would decrease from $1000 to $800, assuming that the liabilities are constant. This illustrative example demonstrates the direct impact of paying expenses in cash on equity.