Question

Owens Industries is trying to increase its profile in the community. As part of this effort, Owens sponsors a Little League baseball team. The cost of sponsorship is $850. How should Owens record this transaction in order to maintain a balanced accounting equation (A = L + SE)?
A) They should credit $850 to assets and debit $850 to stockholders' equity.
B) They should debit $850 to assets and debit $850 to stockholders' equity.
C) They should credit $850 to assets and credit $850 to stockholders' equity.
D) They should debit $850 to assets and credit $850 to liabilities.

Answer 1

Answer:

They should credit $850 to assets and debit $850 to stockholders' equity (A)

Explanation:

The cash outflow of $850 will reduce the cash position of the company (i.e cash balance under current assets, hence it should be credited) while the stockholders's equity account needs to be debited because the transaction represents a depletion in the value of the company.

Asset account is reduced by crediting while common stock account is reduced by debiting.