Assume that Global Cleaning Service performed cleaning services for a department store on account for $180. How would this transaction affect Global Cleaning Service's accounting equation?

(A) Increase both assets and liabilities by $180

(B) Increase both assets and equity by $180

(C) Increase both equity and liabilities by $180

(D) Decrease liabilities by $180, and increase equity by $180

Question

Gracelyn Silva

Business

2 September, 05:56

Assume that Global Cleaning Service performed cleaning services for a department store on account for $180. How would this transaction affect Global Cleaning Service's accounting equation?

(A) Increase both assets and liabilities by $180

(B) Increase both assets and equity by $180

(C) Increase both equity and liabilities by $180

(D) Decrease liabilities by $180, and increase equity by $180

+4

Answers (1)

Know the Answer?

Angel Velasquez · Answer 1

(B) Increase both assets and equity by $180

Explanation:

The transaction analysis model tells us that:

Assets = Liabilities + Owner's Equity

Owner's equity = Contributed Capital + Retained Earnings

Retained Earnings = Net Income - Dividends

and

Net Income = Income - Expenses

The expanded accounting equation is obtain if all substitutions are made:

Asset = Liabilities + Contributed Capital + Income - Expenses - Dividends

In the Global Cleaning Service's case:

Assets are increased either because the service is collected or is an account receivable. As the service provided is a revenue (income) is part of the Owner's Equity that also increase. Both, Asset and Owner's Equity, increase in 180.