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 decrease in assets (cash)

Increase in assets (cash) and equity (revenue)

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

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 electric bill is paid, the cash account (an asset) decreases because cash is going out. At the same time, an expense (utilities) is recognized, which will ultimately lead to a decrease in equity (retained earnings) as expenses reduce net income.