Question

A business paid $5,200 to a creditor in payment of an amount owed. The effect of the transaction on the accounting equation was to______________

Answer 1

The payment of $5,200 to a creditor decreases the business's assets and liabilities equally, maintaining the balance of the accounting equation with no impact on the owner's equity.

Step-by-step explanation:

When a business pays $5,200 to a creditor in payment of an amount owed, the effect on the accounting equation is a decrease in the business's assets (specifically its cash or bank balance) and a decrease in its liabilities (specifically the accounts payable or the specific creditor amount). This transaction keeps the accounting equation balanced. This is because the assets and liabilities are both reduced by the same amount, with no impact on the owner's equity. The accounting equation, Assets = Liabilities + Owner’s Equity, remains in equilibrium.

For example, consider this similar to the process of money transfers, where a fee is paid to move a larger sum from one account to another. The fee does not create new money, it's an expenditure facilitating the transfer. Similarly, paying a creditor does not change the total value of the equation but reallocates the resources within it.