Which of the following best describes an agency relationship in accounting?

• A. A relationship where an accountant provides auditing services to a client.
• B. A partnership formed between two companies to share profits and losses equally.
• C. A relationship where one party (the agent) acts on behalf of another party (the principal) in business transactions.
• D. A contractual agreement between a lender and a borrower regarding loan repayment.

Answer: (C)

Verified step by step guidance

1. Understand the concept of an agency relationship in accounting. It refers to a situation where one party, called the agent, is authorized to act on behalf of another party, called the principal, in business transactions.
2. Analyze the options provided in the question to determine which one aligns with the definition of an agency relationship.
3. Option 1: 'A relationship where an accountant provides auditing services to a client' does not describe an agency relationship, as it refers to a professional service rather than an agent-principal dynamic.
4. Option 2: 'A partnership formed between two companies to share profits and losses equally' is not an agency relationship, as it describes a partnership agreement rather than an agent-principal relationship.
5. Option 4: 'A contractual agreement between a lender and a borrower regarding loan repayment' is not an agency relationship, as it describes a lending agreement rather than an agent-principal relationship. Therefore, the correct answer is the one that explicitly defines the agent-principal relationship.