Final answer:
The statement is true; when a company receives payment for an account receivable, the asset account (accounts receivable) is reduced, balancing the decrease with an increase in cash or reduction in liabilities.
Step-by-step explanation:
The statement, "Additionally, the amount owing from Farley, the accounts receivable, an asset account is being reduced," is true. In accounting, when a payment is received for an outstanding account receivable, the asset account (accounts receivable) is reduced as the firm no longer has a claim to that revenue—it has been settled. This is reflected on a T-account, where the assets are decreased on the left side and the equity or liabilities are adjusted accordingly on the right side to maintain the balance where assets equal liabilities plus net worth.
It's important to understand that in a T-account, the two sides represent a company's financial position: assets on one side and liabilities plus equity (net worth) on the other. Assets include cash, inventory, property, and money owed to the company (accounts receivable), while liabilities include loans, accounts payable, and other debts. Equity, or net worth, represents the owner's stake in the company after liabilities have been subtracted from assets.
So, when a company collects money that was owed to it, the accounts receivable decreases, which in turn reduces the total assets. However, because this transaction does not create a new liability or directly increase the owner's equity, the other side of the T-account might show an increase in cash or a reduction in liabilities if the received funds are used to pay off debts.