If total liabilities decreased by $25,000 and stockholders' equity increased by $5,000 during a period of time,then total assets must change by what amount and direction during the same time period?
A) $20,000 increase
B) $20,000 decrease
C) $30,000 increase
D) $30,000 decrease

Question

Quizplus · Accepted Answer

The accounting equation is Assets = Liabilities + Stockholders' Equity. If total liabilities decreased by $25,000, that means a decrease of $25,000 in the denominator of the equation. If stockholders' equity increased by $5,000, that means an increase of $5,000 in the numerator. To keep the equation in balance, the only option is for total assets to decrease by $20,000, which is the same as the decrease in liabilities. Therefore, the correct answer is B, $20,000 decrease.

If Total Liabilities Decreased by $25,000 and Stockholders' Equity Increased