The Business Earns $700 Of Consulting Revenue How Would These Earnings Affect The Total Equity Of A Business?

The Business Earns $700 Of Consulting Revenue. How Would These Earnings Affect The Total Equity Of A Business? A. Revenues would be decreased, so equity would be decreased. B. Liabilities are decreased, so total equity is increased. C. Revenues increase, so total equity is increased. D. Revenues would be decreased, so equity is increased.
When the business earns $700 of Consulting Revenue (CR), then we debit cash account with $700 and credit consulting revenue account of $700. Here, consulting revenue account is increasing, as it is earning by the business by providing services to client. So, when Revenue is increased, we credit and when it decreases, we debit it. Here, cash account is also increasing as it is receiving by the business, so we debit it according to the Rules of Debit And Credit.

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.

Option D is also wrong choice here as when CR earned by the business, it increases rather than decreases. Due to increase in CR there is an increase in equity and a decrease in CR decreases equity.

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