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. What impact does this transaction have on Owens’ accounting equation (A = L + SE)?

Answer 1

Answer:

Assets will reduce by $850, and stockholder's equity will also reduce by $850

Explanation:

An accounting equation is constant and do not change, it is defined as

Assets = Liabilities + Stockholder's Equity

When the company sponsors the baseball team, it incurs an expense.

For this cash is spent, which is cash outflow and accordingly, it decreases cash and thus, assets are reduced.

On the other hand the sponsorship is an expense which will reduce the revenue which is clubbed in stockholder's equity as retained earnings.

Therefore, stockholder's equity will also be reduced.