If Lou's purchase increased liabilities by $600, what would also need to happen for the accounting equation to be in balance?

If Lou's purchase increased liabilities by $600, what would also need to happen for the accounting equation to be in balance?

• A. Subtract $600 from assets
• B. Add $600 to assets
• C. Add $600 to equity
• D. Subtract $600 from liabilities

Answer: (B)

The basic rule is that assets must always equal liabilities plus equity. Every transaction affects at least two accounts by the same amount, keeping the equation in balance. If a purchase increases liabilities by 600, that means the company has gained a liability of 600 and has received something of value (an asset) in return. To keep the equation balanced, assets must also increase by 600. So the required action is to add 600 to assets. Subtracting from assets or liabilities, or adding to equity, would unbalance the equation.

The basic rule is that assets must always equal liabilities plus equity. Every transaction affects at least two accounts by the same amount, keeping the equation in balance. If a purchase increases liabilities by 600, that means the company has gained a liability of 600 and has received something of value (an asset) in return. To keep the equation balanced, assets must also increase by 600. So the required action is to add 600 to assets. Subtracting from assets or liabilities, or adding to equity, would unbalance the equation.