Question

In part, a transaction affects the accounting equation by decreasing an asset. There is no effect on liabilities. Which of the following statements is correct with regards to this transaction?

If other assets are unchanged, stockholders' equity must be increasing.

If other assets are unchanged, stockholders' equity must be decreasing.

If stockholders' equity is unchanged, another asset must be decreasing.

If stockholders' equity is unchanged, other assets must be unchanged.

Answer 1

Answer:

If other assets are unchanged, stockholders' equity must be decreasing.

Explanation:

By using Accounting Equation as follow:

Asset = Equity + Liability

Tot make the equation balance we have to ensure that the effect on it will also has balancing effect.

Decrease in assets might result in decrease in equity or liability and increase in other assets, but here the liability is constant. There could be only two effect that decrease in equity and increase in other asset. There is no option which shows the increase in other asset. So the decrease in equity is the option will has correct effect to balance the accounting equation all other dis-balance the equation.