Which of the following transactions violates the balance sheet equation? (check all that apply)1 pointIncrease an expense and reduce a liabilityIncrease a liability and increase a revenueIncrease cash and reduce contributed capitalReduce cash and reduce an expenseIncrease retained earnings and increase a liability
Question
Which of the following transactions violates the balance sheet equation? (check all that apply)1 pointIncrease an expense and reduce a liabilityIncrease a liability and increase a revenueIncrease cash and reduce contributed capitalReduce cash and reduce an expenseIncrease retained earnings and increase a liability
Solution
The balance sheet equation is Assets = Liabilities + Equity. This equation must always be in balance. Let's analyze each transaction:
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Increase an expense and reduce a liability: This transaction violates the balance sheet equation. When you increase an expense, it reduces equity (because expenses reduce net income, which is part of equity). But when you reduce a liability, it increases equity. So, the two actions are not balanced.
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Increase a liability and increase a revenue: This transaction does not violate the balance sheet equation. When you increase a liability, it increases the right side of the equation. When you increase revenue, it increases equity (because revenue increases net income, which is part of equity), which also increases the right side of the equation. So, the equation remains balanced.
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Increase cash and reduce contributed capital: This transaction violates the balance sheet equation. When you increase cash, it increases assets (left side of the equation). But when you reduce contributed capital, it reduces equity (right side of the equation). So, the equation is not balanced.
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Reduce cash and reduce an expense: This transaction violates the balance sheet equation. When you reduce cash, it reduces assets (left side of the equation). But when you reduce an expense, it increases equity (because expenses reduce net income, which is part of equity), which increases the right side of the equation. So, the equation is not balanced.
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Increase retained earnings and increase a liability: This transaction does not violate the balance sheet equation. When you increase retained earnings, it increases equity (right side of the equation). When you increase a liability, it also increases the right side of the equation. So, the equation remains balanced.
So, the transactions that violate the balance sheet equation are: Increase an expense and reduce a liability, Increase cash and reduce contributed capital, and Reduce cash and reduce an expense.
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