Question

Londa Corporation pays employees $3,000 for the month. What is the effect on the balance sheet equation? (Select all that apply.)

a)decrease liabilities
b)increase owners' equity
c)increase liabilities
d)decrease owners' equity
e)increase assets
f)decrease assets

Answer 1

Paying employees decreases both assets, as cash is reduced by $3,000, and liabilities, as the salaries payable account is settled. If the salaries affect the income statement, there would also be a decrease in owner's equity due to reduced net income.

Step-by-step explanation:

When Londa Corporation pays employees $3,000 for the month, there are two immediate effects on the balance sheet equation:

• Decrease in assets: The cash balance of Londa Corporation will decrease by $3,000 as this amount is paid out to employees.
• Decrease in liabilities: If the payment is for salaries that were previously accrued, the salaries payable liability will decrease by $3,000, reflecting that the obligation has been settled.
• Decrease in owner's equity: If the salaries were expensed in the income statement, this decreases the net income, which in turn reduces the retained earnings, a component of owner's equity.

The other options provided, such as increasing liabilities or assets, or increasing owner's equity, are incorrect in the context of making a salary payment.