If total liabilities increased by $22,500, then
A)assets must have increased by $22,500.
B)only shareholders' equity must have increased by $22,500.
C)assets must have increased by $22,500, or shareholders' equity must have decreased by $22,500.
D)assets and shareholders' equity must have both decreased by $22,500.

Question

Quizplus · Accepted Answer

The accounting equation states that Assets = Liabilities + Shareholders' Equity. If liabilities increase, either assets must increase by the same amount to keep the equation balanced (reflecting borrowing or acquiring assets through debt), or shareholders' equity must decrease by the same amount (reflecting covering losses or distributions to shareholders that exceed earnings).

If Total Liabilities Increased by $22,500, Then