Chapter 7, Problem 1Q

1. What type of transaction is a cash payment to creditors? How does this type of transaction affect the accounting equation?

To determine

Find the transaction type of “cash payment to creditors” and explain the way it effects the accounting equation.

Explanation of Solution

Asset use transactions are the transactions that results in a decrease of both the asset and claims on assets.

It is an assets use transaction. Cash payment to creditors’ results in cash outflow which decreases the assets (cash) balance and it also decreases the liabilities (accounts payable) balance.

Accounting equation:  Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

$\text{Assets = Liabilities + Stockholders' Equity}$

Assets use transaction reduces both the sides of the accounting equation. That means it decreases the assets (cash) balance as well as it decreases the liabilities (accounts payable) balance.