Question

Saddleback Company paid off $45,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation?

Answer 1

Paying off $45,000 in accounts payable decreases both cash and accounts payable by the same amount, keeping the accounting equation balanced without affecting the owner's equity.

Step-by-step explanation:

When Saddleback Company pays off $45,000 of its accounts payable in cash, there is a decrease in the company's liabilities (specifically accounts payable) and a decrease in assets (cash or cash equivalents). The accounting equation, which is Assets = Liabilities + Owner's Equity, remains in balance because the reduction on both sides of the equation is equal. The effect is a direct decrease in both accounts payable and cash by $45,000.

If we assume that the initial balance sheet of Saddleback Company shows cash as part of assets and accounts payable as part of liabilities, the balance sheet would change as follows:

• Assets: Cash decreases by $45,000.
• Liabilities: Accounts Payable decrease by $45,000.

No change occurs to the owner's equity unless there are reasons such as the payment affecting retained earnings.

Answer 2

Assets and liabilities decrease by $45,000. Equity remains unchanged.

Step-by-step explanation:

Accounting equation = Assets = Liability + Equity

Accounts payable is the amount owed by a company to its suppliers for goods or services received that have not yet been paid for.

Accounts payable is a liability. and cash is an asset. so when the liability is settled, liability reduces and assets reduces.