Saddleback Company paid off $45,000 of its accounts payable in cash. What would be the effects...

Saddleback Company paid off $45,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation?

a.Assets, $45,000 increase; equity, $45,000 increase.

b.Assets, $45,000 decrease; liabilities, $45,000 decrease.

c.Assets, $45,000 decrease; liabilities, $45,000 increase.

d.Liabilities, $45,000 decrease; equity, $45,000 increase.

e.Assets, $45,000 decrease; equity $45,000 decrease.

Expert Solution

Money owed to suppliers of an organization is referred to as accounts payable. Accounts payable represent liability of a company. As Saddleback company has paid off its accounts payable amounting $45000, hence overall liability of a company has decreased by $45000. Therefore liabilities of Saddlback will decrease by $45000 when it pays off its accounts payable.

Cash held by the company is an asset account. Since the Saddleback has used cash to pay accounts payable, it has resulted in outflow of cash by $45000. Outflow of cash results in decrease in cash balance by $45000 or decrease in overall assets of the company by $45000. As cash is an asset, therefore outflow of cash results in decrease in assets of Saddlback by $45000

Hence the transaction results in decrease in assets by $45000 and decrease in liabilities of Saddleback by $45000

b. Assets, $45000 decrease; liabilities, $45000 decrease.

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