The Business Earns $700 Of Consulting Revenue How Would These Earnings Affect The Total Equity Of A Business?
The effect of this Business Transaction on Accounting Equation is that cash increases on asset side by $700, so total assets increased by $700 on left side while revenue affects Equity (E) as it is earned by the business due to the profitable activities of the owner of the business, so equity increases by $700 on right side or liabilities & equity side due to increase in consulting revenue account of $700 as shown below:
Assets = Liabilities + Equity
+Cash = + (+Consulting Revenue)
+$700 = + +$700
As both sides i.e., left side and right side of the accounting equation
increased by $700, so the accounting equation remains in balance.
So, the correct option of this multiple choice question is C while other
options A, B and D are incorrect choices here as explained below:
Option A is incorrect as when the business earns consulting revenue, it is
not decreased but increased, so the equity is also not decreased but increased.
Option B is totally wrong as CR is not a liability account but a revenue
account for the business which increased the E account. So, here, liability is
not the cause of increase in E account.
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