Question

Which of the following is not possible when recording a transaction?

A) Stockholders' equity decreases and assets decrease.
B) One asset increases and another asset decreases.
C) Stockholders' equity increases and assets increase.
D) Liabilities increase and assets decrease.

Answer 1

Option D (Liabilities increase and assets decrease) is not possible when recording a transaction as it violates the fundamental accounting equation where assets must always equal liabilities plus stockholders' equity.

Step-by-step explanation:

The question asks which of the following is not possible when recording a transaction:

• A) Stockholders' equity decreases and assets decrease.
• B) One asset increases and another asset decreases.
• C) Stockholders' equity increases and assets increase.
• D) Liabilities increase and assets decrease.

According to the accounting equation, assets must always equal liabilities plus stockholders' equity (T-account principle). Thus, option D) Liabilities increase and assets decrease is not possible because it violates the fundamental accounting equation. An increase in liabilities should result in either an increase in assets (when borrowing or receiving an asset) or a decrease in stockholders' equity (when incurring a loss or making a payment that does not involve an asset), but not a decrease in assets.