If the total liabilities of a business decrease by $5000 what will be the effect on total asset? (assuming the amount of capital remain same)?

Correct option is '2'

Because Total Assets - Total Liabilities = Equity

Payments of liabilities bring decrease in assets especially current assets.

According to Debit & Credit rules:

Decrease in Liabilities by $5000 will be recorded on Credit side & the payment will decrease  current assets by the same amount of money.

 

Ans:         2. Decrease by $5000 in assets

 

The correct answer is:2- Decrease by $5000

the current assets will decrease by $5000 due to the principle of double entry in financial accounting.furthermore, current assets determines the liquidity of the business to settle its debt hence the asset of $5000 was used to settle the liability

Definitely Decrease by $5000...........

Decrease by5000$ as in a double entry system, assets reduce with reduction in liabilities.

Option2 is the right answer.

Both are B/S item, which means if the liabilities reducing asset will automatically decrease.

2. Decrease by $5000 

Decrease by $6000............

TOTAL ASSETS WILL REMAIN CONSTANT...HOWEVER IT WILL EFFECT EQUITY..EQUITY WILL INCREASE BY $5000

2. Decrease by $5,000

Following the accounting equation principles Assets = Capital + Liability

For example If Capital is $20,000 and Liabilities is $10,000 then Asset will be $30,000

Should liabilities decrease by $5,000 which may be due to payment by cash or cheque which forms part of a company assets, then Assets will be $25,000 (20,000 +5,000). Asset has reduced by the same margin of reduction in liabilities.