If a company paid $38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity?
A) Assets would decrease $38,000, liabilities would decrease $38,000, and equity would decrease $38,000.
B) Assets would decrease $38,000, liabilities would decrease $38,000, and equity would increase $38,000.
C) Assets would decrease $38,000, liabilities would decrease $38,000, and equity would not change.
D) There would be no effect on the accounts because the accounts are affected by the same amount.
E) None of these.

Question

Quizplus · Accepted Answer

When a company pays its accounts payable in cash, there is a reduction in both assets and liabilities by the same amount. Accounts payable is a liability account, so when it is paid, the liability decreases, and cash, which is an asset, decreases as well. There is no impact on equity because equity is a residual claim and is only affected by changes in assets and liabilities that are not related to owner transactions. Thus the correct option is C, where Assets would decrease $38,000, liabilities would decrease $38,000, and equity would not change.

If a Company Paid $38,000 of Its Accounts Payable in Cash