Which statement correctly describes the effect of the two sales on the accounting equation for John's retail store?

Which statement correctly describes the effect of the two sales on the accounting equation for John's retail store?

• A. The cash sale increases assets but decreases owner's equity
• B. The credit card sale increases liabilities
• C. The cash sale increases assets and owner's equity, while the credit card sale increases liabilities
• D. Both sales increase assets and owner's equity

Answer: (D)

A sale boosts both sides of the accounting equation in the sense that it increases what the business owns and what it earns. For a cash sale, you receive cash, which increases assets, and you record revenue, which raises owners’ equity through higher retained earnings. For a credit card sale, you still recognize revenue now and you’ll record an asset (a receivable or cash when settlement occurs). That revenue increases net income, which raises owners’ equity. The transaction itself doesn’t create a liability; the effect is an increase in assets and an increase in owners’ equity for both types of sales.

A sale boosts both sides of the accounting equation in the sense that it increases what the business owns and what it earns. For a cash sale, you receive cash, which increases assets, and you record revenue, which raises owners’ equity through higher retained earnings. For a credit card sale, you still recognize revenue now and you’ll record an asset (a receivable or cash when settlement occurs). That revenue increases net income, which raises owners’ equity. The transaction itself doesn’t create a liability; the effect is an increase in assets and an increase in owners’ equity for both types of sales.