A business pays off a note payable. What effect does this have on the accounting
ID: 2426063 • Letter: A
Question
A business pays off a note payable. What effect does this have on the accounting equation? Assets go up, Liabilities go down, and Stockholders' Equity remains the same. Assets go down, Liabilities remain the same, and Stockholders' Equity goes up. Assets go up, Liabilities remain the same, and Stockholders' Equity goes up. Assets go down, Liabilities go down, and Stockholders' Equity remains the same. A business purchases a computer for cash. What effect does this have on the accounting equation Assets go up and Liabilities go down. Stockholders' Equity and Assets go up. Stockholders' Equity and Liabilities go up. There is no change in Total Assets.Explanation / Answer
A) A note payable is a liability of the business. When it pays off the note payable, liability is reduced and at the same time cash is also reduced by an equal amount thereby leaving the equity unchanged. Hence the accounting equation is balanced. So, when the organisation pays off note payable following happens:
LIABILITIES GO DOWN, ASSETS GO DOWN AND STOCKHOLDER EQUITY REMAINS THE SAME.
Correct Answer: D
B) When a business purchases computer in cash, it means that a new asset is being introduced by using an equal amount of cash which is also an asset, thereby having a neutral effect on total assets. Liability does not come into the picture , equity does not come into the picture and assets are netted off to have a nil effect on total assets, thereby leaving accounting equation balanced. Following happens:
THERE IS NO CHANGE IN TOTAL ASSETS
Correct Choice: D
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