How does paying a liability in cash affect the accounting equation?

  • a. Assets increase; liabilities decrease
  • b. Assets increase; liabilities increase
  • c. Assets decrease; liabilities decrease
  • d. liabilities decrease; owner's equity increases
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Accounting equation Assets = Liabilities + Shareholders' Equity
  • Assets are the source company can use, for example, cash, inventory, accounts receivable etc.
  • Liabilities are usually accounts payable, for example, suppliers, tax etc.
  • Shareholders' Equity includes all the payments and assets taken from and provided to owner(s) and investors. If liabilities are purchased with cash then supplies will be bought against income statement. It would affect net income. In simple words, it means assets will decrease, so will the liabilities. More on balancing accounting equation in this document.
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