Question

What effect will paying for gas for a company car with a credit card have on the accounting equation?

Question 5 options:

	Assets increase, Liabilities increase
	Assets decrease, Equity decrease
	Assets decrease, Liabilities Increase
	Liabilities increase, Equity decrease

Answer 1

D) Liabilities increase, equity decrease

Explanation : Buying gas for company's car by credit card, increases the short term debt which would be repayable to the bank. After that transaction, card holder is liable to pay such debt to the bank. It is a short term liability. So, after the transaction of buying gas, liability increased.

As, we know expenses reduce net income, and simultaneously reduction of net income reduce retained earnings. So, after making such expenditures retained earnings reduced, which ultimately reduces the equity.

Why other alternatives are not applicable :

The effect of the given transaction is not at all associated with any asset . Buying gas is an expenditure and payment made by credit card is a liability.

So all the other alternatives related with increase or decrease of assets are totally not applicable in this case.