If total liabilities increased by $4,000, then
A) assets must have decreased by $4,000.
B) owner's equity must have increased by $4,000.
C) assets must have increased by $4,000, or owner's equity must have decreased by $4,000.
D) assets and owner's equity each increased by $2,000.

Question

Quizplus · Accepted Answer

The fundamental accounting equation is Assets = Liabilities + Owner's Equity. If total liabilities increased by $4,000, then either assets must have also increased by $4,000 or owner's equity must have decreased by $4,000 to maintain the equation. Option A is incorrect because total assets could have remained unchanged or even increased while liabilities increased. Option B is incorrect because an increase in liabilities would not lead to an increase in owner's equity. Option D is incorrect because it assumes that both assets and owner's equity increased, which is not necessarily true.

If Total Liabilities Increased by $4,000, Then