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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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The effects of paying salaries for the current period are to:

  1. increase assets and increase stock- holders’ equity.
  2. increase assets and increase liabilities.
  3. decrease assets and decrease liabilities.
  4. decrease assets and decrease stock- holders’ equity.

To determine

Introduction: The first step involved in the process of recording economic events in any business is to analyze the transaction. Transaction analysis is the process of analyzing each transaction to determine the effect of each transaction in two parts or dual effect on each element of an accounting equation so that the equation is in balance. This is shown as:

Assets=liabilities+Stockholdersequity

To select-An option for purchasing inventory on credit.

Explanation

Explanation for correct answer- According to expense recognition principle, expenses are recorded when they are realized or incurred. It might predate or follow with related amount of revenue. Thus, in transaction analysis, when salaries are paid for the current period in a company, it will have two effects on accounting equation.

  1. Salaries are treated as expenses and an expense decreases the retained earnings in stockholder’s equity.
  2. Since this transaction is a part of operating activity and asset is consumed in operating activity of business, so salaries will reduce the assets of the company.

Therefore, Option D is correct which means that salaries paid for the current period will reduce the retained earnings and assets with the same amount.

Explanation for incorrect answer-

Option A- When salaries are paid for the current month it will not increase assets rather it will decrease assets since asset is consumed in operating activity of the business...

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