Question

Doug's Doodle Shop, specializing in dog supplies, signs a contract with a pet groomer. Next month, the groomer will begin leasing a portion of Doug's store and provide grooming services. The signing of the contract:

A) has no effect on the accounting equation.

B) increases assets.

C) increases liabilities.

D) decreases stockholders' equity.

Answer 1

Solution: The correct option is “A” i.e has no effect on the accounting equation

The accounting equation is the foundation upon which the double entry system of book keeping is based. The accounting equation is depicted in the following manner

i.e Assets = Liabilities+Shareholder’s Equity

This is doesn’t affect the accounting equation because every transaction that is entered into or contracted for is balanced within the accounting equation itself. This happens in the following manner i.e either the transaction brings about changes on both sides of the accounting equation (eg : The transaction leads to increase in assets and a corresponding increase in the shareholder’s equity )or the transaction cancels itself on one side of the accounting equation itself( eg: The accounts receivable is converted into cash ).