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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

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  1. 2 September, 06:13
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    (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.
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