- A. If one asset account is increased, then another asset account must be decreased in order for the left side of the accounting equation to be balanced.
- B. After recording a transaction, the total of the right side of the accounting equation must equal the total of the left side of the accounting equation.
- C. If total assets are increased, then liabilities only are increased as well.
- D. If one account is credited, then at least one other account must be credited as well.
The correct answer is:
B. After recording a transaction, the total of the right side of the accounting equation must equal the total of the left side of the accounting equation.
Why Option B is Correct:
The core principle of double-entry accounting is that every transaction impacts at least two accounts, and these changes must always keep the accounting equation in balance. The accounting equation is:
Assets = Liabilities + Equity
This equation must remain balanced after every transaction because:
1. Double-Entry Accounting Principle
Each transaction involves at least one debit and one credit, meaning that for every amount entered on the left side (assets), an equal amount is entered on the right side (liabilities and equity). The debits and credits must always be equal to ensure that the accounting equation is satisfied.
Example of a Transaction:
- Transaction: A company takes out a loan of $10,000 in cash.
- Debit: Increase in Cash (Asset) by $10,000.
- Credit: Increase in Loan Payable (Liability) by $10,000.
After this transaction, the accounting equation still holds:
- Assets (Cash) = Liabilities (Loan Payable) + Equity
- $10,000 = $10,000 + $0 (equity remains unchanged)
The equation stays balanced because the increase in assets (cash) equals the increase in liabilities (loan).
2. Why the Other Options Are Incorrect:
- Option A: Incorrect. If one asset increases, it doesn’t necessarily mean another asset must decrease. For example, when a business buys equipment using cash, cash decreases, but equipment (asset) increases. It does not violate the equation because total assets are still equal to liabilities plus equity.
- Option C: Incorrect. If total assets increase, liabilities and equity can both change depending on the nature of the transaction. For instance, if a company borrows money (increasing liabilities), or issues stock (increasing equity), assets increase but not just liabilities.
- Option D: Incorrect. If one account is credited, another account must be debited, not credited, in order to maintain the balance. This ensures the equation remains in balance and the transaction is recorded properly.
3. The Importance of Balance
The accounting equation must always balance because it represents a company’s financial position. If the equation becomes unbalanced, it suggests that there are errors in the recording of transactions, which could lead to financial inaccuracies or fraud.
4. Real-World Application and Proof
This principle is critical for the preparation of accurate financial statements like the balance sheet. The balance sheet is essentially a snapshot of the accounting equation at a specific point in time, showing that assets always equal liabilities and equity.
- International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) both emphasize the importance of this balance to ensure accurate financial reporting.
Conclusion:
Option B is correct because the fundamental principle of double-entry accounting requires that after each transaction, the total of assets must equal the combined total of liabilities and equity, maintaining the integrity and balance of financial statements.
