A business settles a liability by making a payment in cash. How does paying this liability affect the accounting equation of the business?
A)Assets decrease; liabilities decrease.
B)Liabilities decrease; equity increases.
C)Assets increase; liabilities increase.
D)Assets increase; equity decreases.

Question

Quizplus · Accepted Answer

When a business pays off a liability with cash, its assets (cash) decrease and its liabilities decrease by the same amount, keeping the accounting equation balanced.

A Business Settles a Liability by Making a Payment in Cash