Question

Doug's Doodle Shop, specializing in dog supplies, signs a contract with a pet groomer. Next month, the groomer will begin leasing a portion of Doug's store and provide grooming services. The signing of the contract:

A) has no effect on the accounting equation.
B) increases assets.
C) increases liabilities.
D) decreases stockholders' equity.

Answer 1

The signing of the contract itself does not immediately alter the accounting equation; changes occur when the lease payments are made or received.

Step-by-step explanation:

Signing a contract with a pet groomer to lease a portion of Doug's Doodle Shop will affect the accounting equation once the actual transaction of paying or receiving the lease payment occurs.

However, at the point of signing the contract, there is no immediate financial transaction, so there is no effect on the assets, liabilities, or stockholders' equity at that moment.

Once the transaction begins and payments are made or received, either assets will increase if the shop receives a deposit or prepayment, or liabilities may increase if the shop has an obligation to provide space or services before receiving payment.