What effect does the adjusting entry recognizing interest expense have on the basic accounting equation?
A) Increase in assets,increase in liabilities
B) Increase in liabilities,decrease in shareholders' equity
C) Decrease in assets,decrease in liabilities
D) Decrease in liabilities,increase in shareholders' equity

Question

Quizplus · Accepted Answer

Recognizing interest expense through an adjusting entry increases the expense and decreases the net income, which ultimately decreases the shareholders' equity. However, as interest expense is usually associated with borrowing, it increases the liabilities because the company is responsible for paying interest on its outstanding debts. Therefore, this entry has a dual effect on the basic accounting equation, i.e., it increases liabilities and decreases the shareholders' equity.

What Effect Does the Adjusting Entry Recognizing Interest Expense Have