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

Question

Quizplus · Accepted Answer

When a firm borrows money, it receives cash (asset) which increases its assets. At the same time, the firm incurs a liability (ex. loan) which also increases. Since there is an increase in both assets and liabilities, there is no effect on stockholders' equity, which means option A is incorrect. Option C is also incorrect because liabilities increase instead of decreasing. Option D is incorrect because assets increase instead of decreasing.

One Effect on the Accounting Equation When a Firm Borrows