Practice Quiz

Case Interview Prep

Category - Accounting

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If Petey’s Printing is providing printing services on account, how is his balance sheet affected?
  1. Assets decrease; owner’s equity decreases
  2. Assets increase; owner’s equity increases
  3. Liabilities increase; owner’s equity decreases
  4. Assets increase; owner’s equity decreases
  5. Liabilities decrease; assets increase
Explanation
Answer - B - Providing services on account will increase an asset (the A/R account) and increase the owner’s equity account.

Key Takeaway: The basic accounting equation: Assets = Liabilities + Owner’s Equity comes in handy for balance sheet questions regarding increases and decreases. Since the services rendered will increase revenue, which is an increase to owner’s equity, there should be a corresponding increase to an asset. In this case, since the transaction was on account, it would be the accounts receivable.
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