The cash payment of a liability: Group of answer choices decreases assets and equity. increases assets and decreases liabilities. decreases assets and increases liabilities. decreases assets and liabilities.
Question
The cash payment of a liability: Group of answer choices
decreases assets and equity.
increases assets and decreases liabilities.
decreases assets and increases liabilities.
decreases assets and liabilities.
Solution
The cash payment of a liability decreases assets and liabilities.
Here's why:
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When a company pays off a liability with cash, it is using one of its assets (cash) to reduce its obligations (liabilities).
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The cash account, an asset account, decreases because the company has less cash after making the payment. This is recorded as a credit to the Cash account.
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The liability account decreases because the company has fewer obligations after paying off the liability. This is recorded as a debit to the Liability account.
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Therefore, the cash payment of a liability decreases both assets (Cash) and liabilities. The equity of the company does not change as a result of this transaction.
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