Paying cash for supplies previously purchased on account would have what effect on the fundamental accounting equation?

• A. Assets decrease and equity decreases; liabilities remain unchanged.
• B. Assets increase and liabilities decrease; equity remains unchanged.
• C. Assets increase and equity increases; liabilities remain unchanged.
• D. Assets decrease and liabilities decrease; equity remains unchanged.

Answer: (D)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.
2. Identify the transaction: Paying cash for supplies previously purchased on account. This means cash (an asset) is being used to settle a liability (accounts payable).
3. Analyze the impact on assets: Cash decreases because it is being used to pay off the liability. Supplies were already recorded as an asset when purchased, so there is no additional increase in assets.
4. Analyze the impact on liabilities: Accounts payable (a liability) decreases because the debt is being settled with cash.
5. Conclude the effect on equity: Equity remains unchanged because this transaction does not involve revenue, expenses, or owner contributions/distributions.