Which of the following transactions will increase both assets and liabilities in the fundamental accounting equation (\(\text{Assets} = \text{Liabilities} + \text{Equity}\))?

• A. Paying off an accounts payable with cash
• B. Borrowing cash from a bank by signing a note payable
• C. Receiving cash from a customer for a service already performed
• D. Purchasing equipment by paying cash

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the fundamental accounting equation, which is expressed as: $\mathrm{Assets}=\mathrm{Liabilities}+\mathrm{Equity}$. This equation must always remain balanced, meaning any change in one component must be offset by a change in another.
2. Step 2: Analyze each transaction to determine its impact on assets and liabilities. For example, paying off accounts payable with cash decreases both assets (cash) and liabilities (accounts payable), so it does not increase both assets and liabilities.
3. Step 3: Consider the transaction 'Borrowing cash from a bank by signing a note payable.' This increases assets (cash received) and liabilities (note payable created), satisfying the condition of increasing both assets and liabilities.
4. Step 4: Evaluate the transaction 'Receiving cash from a customer for a service already performed.' This increases assets (cash received) but decreases liabilities (unearned revenue, if previously recorded), so it does not increase both assets and liabilities.
5. Step 5: Examine the transaction 'Purchasing equipment by paying cash.' This decreases one asset (cash) while increasing another asset (equipment), but it does not affect liabilities, so it does not increase both assets and liabilities.