Accounting class question?

Question

When the owner writes a company check to pay the firm's electric bill,

a) assets and owner's equity increase
b) assets decrease and expenses increase
c) assets and liabilities decrease
d) expenses increase and owner's equity increases

Answer 1

B. Assets (Cash) decrease and Expenses (Utilities Expense) Increase. Think the problem through before you give up.

Answer 2

(c) Assets and liabilities decrease

A liability is what you owe; so when the owner writes a check to the Electric Co. the firm's paying on what they owe and that decreases their total debt.

At the same time, by writing this check, the owner is decreasing the firm's assets because he's using cash (an asset) to pay the electric bill.

Answer 3

B. Assets decrease and expenses increase.

Cash account decreases because you wrote a check and utilities expense would increase to recognize the bill. This is of course based on a cash-basis accounting system.

The answer could be C if you use a complicated accrual basis system, but I doubt beginning level accounting level classes get into that.

Answer 4

When you write a check, cash goes down. What is cash? An asset. When you pay the electric, you are paying a company expense, so expenses increase. Try to picture what the question is asking. It gets a lot tougher than this.

Answer 5

C, the owner's money (the assets) decreases because he paid the bill and the liabilities (electric bills, etc) also decrease because the bill is paid