If the business paid cash for materials and labor, what would be the impact on the accounting equation?

• A. Assets would decrease and increase for the same $150,000, making a zero net effect
• B. Assets and liabilities would both increase by $150,000
• C. Assets would increase by $150,000, and liabilities would decrease by $150,000
• D. Assets would increase by $150,000, and equity would increase by $150,000

Answer: (A)

When cash is used to acquire materials and labor, you’re simply transferring value from one asset to another. Paying cash reduces the cash asset, and the company now holds materials or work-in-process (an asset) worth the same amount. Liabilities and equity don’t change in this immediate transaction, so total assets stay the same. The net effect on the accounting equation is zero because one asset decreases while another increases by the same amount.