How does the payment of rent for equipment affect the fundamental accounting equation?

• A. Assets increase and liabilities increase.
• B. Liabilities decrease and owner's equity increases.
• C. Assets increase and owner's equity decreases.
• D. Assets decrease and owner's equity decreases.

Answer: (D)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Owner's Equity. This equation must always remain balanced.
2. Identify the nature of the transaction: Payment of rent for equipment is an expense, which reduces cash (an asset) and impacts owner's equity by decreasing it due to the expense incurred.
3. Analyze the impact on assets: Since cash is used to pay rent, the cash account (an asset) decreases.
4. Analyze the impact on owner's equity: Rent payment is recorded as an expense, which reduces net income. A decrease in net income leads to a decrease in owner's equity.
5. Conclude the effect: The payment of rent for equipment results in a decrease in assets (cash) and a decrease in owner's equity (due to the expense).