A novelties company makes cash sales to customers.What effect does this transaction have on the accounting equation?

Question

Quizplus · Accepted Answer

When a novelties company makes cash sales, it receives cash (an asset) from customers in exchange for goods (also an asset). This increases assets. As there is no borrowing or increase in capital, liabilities do not increase. Retained earnings do not increase as this is the amount of profits kept by the company after paying dividends to shareholders. Therefore, only assets and retained earnings increase, making C the correct choice.

A Novelties Company Makes Cash Sales to Customers