The concept of the accounting equation is fundamental in accounting. The accounting equation is:
[tex]\[ \text{Assets} = \text{Liabilities} + \text{Equity} \][/tex]
This equation represents the relationship between a company’s resources (assets), what it owes (liabilities), and the owner’s claims on the business (equity).
By definition, every financial transaction affects at least two of these accounts to keep the equation in balance. For instance, if a company takes out a loan (increases liabilities), it might also increase its assets by receiving cash from the loan.
Let's break it down further to ensure clarity:
1. Transactions Increase Both Sides Equally:
- If a company borrows [tex]$1,000 from a bank, its assets (cash) increase by $[/tex]1,000 and its liabilities (bank loan) increase by [tex]$1,000 as well.
2. Transactions Decrease Both Sides Equally:
- If the company pays off $[/tex]500 of that loan, its assets decrease by [tex]$500 (cash is paid out), and its liabilities decrease by $[/tex]500 (loan is reduced).
3. Transactions Affect Equity Directly:
- When a company earns income, assets (cash or accounts receivable) increase, which simultaneously increases equity (retained earnings).
Through each transaction, the equality of the accounting equation must be preserved. This principle underpins double-entry bookkeeping, where every transaction is recorded in at least two accounts.
Given this understanding, the statement "The accounting equation must be in balance after every transaction" is indeed always true.
Therefore, the correct answer is:
A. True
