The payment of a liability decreases both assets and liabilitiesGroup of answer choicesTrueFalse

Break Down the Problem

1. Identify the relationship between assets, liabilities, and payments.
2. Analyze how the payment of a liability impacts the financial statements.

Relevant Concepts

3. The accounting equation: Assets = Liabilities + Equity.
4. The effect of a payment on the accounting equation.

Analysis and Detail

5. When a payment is made to settle a liability, cash (an asset) decreases, and the liability itself decreases.
6. For example, if a company pays $1,000 to settle a liability:
   • Assets decrease by $1,000 (cash outflow).
   • Liabilities decrease by $1,000 (settlement of debt).

Verify and Summarize

7. This means both sides of the accounting equation are affected equally:
   • Before payment: Assets = Liabilities + Equity
   • After payment: Assets - $1,000 = Liabilities -$1,000 + Equity

Final Answer

True: The payment of a liability decreases both assets and liabilities.