One effect on the accounting equation when a firm borrows money is
A) stockholders' equity decreases.
B) assets increase.
C) liabilities decrease.
D) assets decrease.

Question

Quizplus · Accepted Answer

When a firm borrows money, its assets increase because it has received cash (an asset) from the loan. At the same time, its liabilities increase because it now owes a debt to the lender. The accounting equation is Assets = Liabilities + Stockholders' Equity, so an increase in assets would be offset by an increase in liabilities, leaving stockholders' equity unchanged.

One Effect on the Accounting Equation When a Firm Borrows