Star Homes Inc. just recorded a transaction in its books of accounts. If this transaction increased the total liabilities by $7,000:

Question

Quizplus · Accepted Answer

If the total liabilities increased by $7,000, then either the assets would need to increase by $7,000 or the equity would need to decrease by the same amount. This is because assets = liabilities + equity, and any increase on one side of the equation must be matched by an increase on the other side or a decrease on the same side. Therefore, option A is the correct answer. Options B, C, and D are all incorrect because they do not reflect the fact that an increase in liabilities must be accompanied by an increase in assets or a decrease in equity.