Mary's company received the electric bill for the month and paid by check. What is the effect on the accounting equation?

Question

Increase in assets (cash) and equity (revenue)

Decrease in assets (cash) and increase in expenses (utilities)

Increase in assets (cash) and decrease in assets (cash)

Decrease in assets (cash) and liabilities (accounts payable)

Answer 1

The correct effect on the accounting equation when Mary's company pays the electric bill by check is:

Decrease in assets (cash) and increase in expenses (utilities)

When the company pays the electric bill, cash (an asset) decreases because it is going out of the business to pay for the utility expense. At the same time, expenses (utilities in this case) increase, which ultimately decreases equity since expenses reduce net income. Thus, the accounting equation remains balanced through this transaction.