Question

How does an increase in an expense affect the accounting equation, assuming the expense was paid in cash.

Answer 1

Accounting Equation
	Assets	=	Liabilities	+	Stockholders’ Equity
					Notes		Com.		Retained Earnings	Acct.
Event	Cash	+	Land	=	Payable	+	Stock	+	Title/RE
Paid Operating Expenses	-22,500		0		0		0		-22,500	Op. Exp.
Totals	-22,500	+	0	=	0	+	0	+	-22,500
When expenses are paid in cash, this means that cash account is decreased, while the amount of the expense reduces the retained earnings account. Thus, the Assets portion of the balance sheet decreases, while the equity portion also declines.