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LOS c: Explain the process of recording business transactions using an accounting system based on the accounting equations.

Which of the following least accurately describes a correct use of double-entry accounting?

A)	A transaction may be recorded in more than two accounts.

B)	A decrease in a liability account may be balanced by a decrease in another liability account.

C)	An increase in an asset account may be balanced by an increase in an owner’s equity account.

Keeping the accounting equation in balance requires double-entry accounting, in which a transaction has to be recorded in at least two accounts. An increase in an asset account, for example, must be balanced by a decrease in another asset account or by an increase in a liability or owners’ equity account. A decrease in a liability account may be balanced by an increase in another liability account, not a decrease. If two liabilities decrease without a balancing entry, the balance sheet will be out of balance.

A)	an increase in an asset account and an increase in a liability account.

B)	an increase in two asset accounts.

C)	an increase in one asset account and a decrease in another asset account.

The purchase of equipment for cash is an increase in property, plant and equipment (an asset) and a decrease in cash (another asset).

Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn’s assets and liabilities?

The down payment will increase cash (an asset) and unearned revenue (a liability). Revenues (and thus retained earnings and owner’s equity) will not increase because the car has not been delivered.

A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to affect which accounts?

Assets only

Assets, revenue, expenses, owners' equity

Assets only

Assets and revenues only

Assets and expenses

Assets, revenue, expenses, owners' equity

The purchase will be a decrease in cash and an increase in inventory, both asset accounts. The expense is not recorded until the chairs are sold. The sale will be a decrease in inventory and an increase in cash (assets), an increase in sales (revenues), an increase in cost of goods sold (expenses), and an increase in retained earnings (owners’ equity) for the $250 profit.