Final answer:
Properly recording transactions into the accounting equation involves understanding how assets, liabilities, and equity are affected. Assets increase on the left side, liabilities can decrease on the right side, equity increases on the right side, and expenses decrease equity on the right side rather than directly affecting assets.
Step-by-step explanation:
When recording transactions into the accounting equation, the following statements are correct:
- Assets increase on the left side of the equation. This is because the assets of a firm are recorded on the left side of a T-account.
- Liabilities decrease on the right side of the equation when the firm pays off debts or obligations.
- Equity increases on the right side of the equation with earned profits or additional investments from owners.
- Expenses do not directly decrease on the left side of the equation; instead, they decrease equity on the right side because expenses are subtractions from the owner's equity. It's the equity that is affected by expenses rather than the assets directly.
All firms, including banks, use T-accounts as a simplistic representation to maintain their financial records where the equation assets = liabilities + equity always holds true. In practice, accounts are much more complex and accounts for various types of assets and liabilities, as well as owner's equity which includes retained earnings and additional investments. This format ensures that the balance sheet is always balanced, reflecting the fundamental concept of double-entry accounting.