Question

Assume that Wave Rider paid expenses totaling $32,000. How does this transaction affect Wave Rider's accounting equation?

a) Increase Assets, Increase Liabilities
b) Increase Assets, Decrease Equity
c) Decrease Assets, Increase Liabilities
d) Decrease Assets, Decrease Equity

Answer 1

When Wave Rider pays expenses, it decreases both Assets and Equity in the accounting equation.

Step-by-step explanation:

The accounting equation is Assets = Liabilities + Equity. When Wave Rider pays expenses totaling $32,000, it affects the equation by decreasing Assets and decreasing Equity.

Expenses are recorded as a decrease in assets because the company is using its resources (cash or other assets) to cover its expenses.

Equity is also decreased because expenses are subtracted from the owner's or shareholders' equity, reflecting a decrease in the company's overall value.