If Assets Increase And Liabilities Decrease What Happens To Equity
Here we are concerned with the Accounting Questions that “if assets increase and liabilities decrease, then what effect will be on Equity or owner's equity or Capital” And "If There is an increase / decrease in liabilities what will happen to assets"?
Practically, it is impossible that assets increase and liabilities decrease at the same time as increase in assets is debited and decrease in liabilities is also debited. According to Dual Aspect Accounting Concept, "For every debit, there must be a credit with an equal amount". However, there are possibilities that total assets are increased and total liabilities are decreased and vice versa. Also, there are possibilities that assets increase and liabilities increase with an equal amount at the same time or assets decrease and liabilities also decrease with an equal amount. In order to answer these questions, we use Accounting Equation which shows that:
Example: Suppose, the company has assets worth Rs. 50000 on 31st December, 2019. Liabilities and Equity on 31st December, 2019 are Rs. 15000 and Rs. 35000 respectively.
Now, we know that before increase of assets and increase of liabilities, the equity is Rs. 35000.
Suppose, the net value of asset (cash) increased by Rs. 10000 due to bank loan and the liability (bank loan) is also increased by Rs. 10000, then what will be the equity after such changes is shown below:
Assets after increased is Rs. 60000 and liabilities after decreased is Rs. 25000, now what is equity?
By applying Accounting Equation, we get:
60000 = 25000 + Equity
Equity = Rs. 35000
So, we can see that equity is remained unchanged or there will be no effect on equity as there is an equal change in the value of assets and liabilities as it is proved by accounting equation.
The examples in which an asset decreases and a liability decreases include cash paid to suppliers, repay the liability, etc.
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