The payment of $20,000 for expenses was incorrectly recorded by Elite Co.as an increase in cash of $20,000 and a decrease in retained earnings of $20,000.What is the effect of this error on the accounting equation?
A) Total assets will exceed total liabilities and stockholders' equity by $20,000.
B) Total assets will exceed total liabilities and stockholders' equity by $40,000.
C) Total assets will be less than total liabilities and stockholders' equity by $40,000.
D) The error will not affect the accounting equation.

Question

Quizplus · Accepted Answer

The error incorrectly increased cash (an asset) by $20,000 instead of decreasing it, and it decreased retained earnings (part of stockholders' equity) by $20,000, which should not have been affected this way for an expense payment. This double error inflates total assets by $20,000 and decreases stockholders' equity by $20,000, leading to a $40,000 discrepancy where total assets exceed total liabilities and stockholders' equity by $40,000.

The Payment of $20,000 for Expenses Was Incorrectly Recorded by Elite