Question

Assume that Global Cleaning Service performed cleaning services for a department store on account for​ $180. How would this transaction affect Global Cleaning​ Service's accounting​ equation?
(A) Increase both assets and liabilities by $180
(B) Increase both assets and equity by $180
(C) Increase both equity and liabilities by $180
(D) Decrease liabilities by $180, and increase equity by $180

Answer 1

Answer:

(B) Increase both assets and equity by $180

Explanation:

The transaction analysis model tells us that:

Assets = Liabilities + Owner's Equity

Owner's equity = Contributed Capital + Retained Earnings

Retained Earnings = Net Income − Dividends

and

Net Income = Income − Expenses

The expanded accounting equation is obtain if all substitutions are made:

Asset = Liabilities + Contributed Capital + Income – Expenses − Dividends

In the Global Cleaning Service`s case:

Assets are increased either because the service is collected or is an account receivable. As the service provided is a revenue (income) is part of the Owner's Equity that also increase. Both, Asset and Owner's Equity, increase in 180.