Your company pays back $2 million on a loan it had received earlier from a bank.How does this transaction affect the accounting equation?

Question

Quizplus · Accepted Answer

When the company pays back a loan, its assets decrease by the amount paid (in this case, $2 million) because it no longer owes that amount. Similarly, the company's liabilities decrease by $2 million because the debt has been repaid. However, this transaction does not affect shareholders' equity, so it remains unchanged. Therefore, the accounting equation is balanced as follows: 
Assets = Liabilities + Shareholders' Equity 
Before the transaction: 
A = L + SE 
After the transaction: 
(A - $2 million) = (L - $2 million) + SE 
The equation is still balanced, and the total value of the firm remains the same.

Your Company Pays Back $2 Million on a Loan It