Question

Mayfly Company collected $42,000 cash on its accounts receivable. What are the effects of this transaction as reflected in the accounting equation?

1) Assets increase, liabilities increase
2) Assets increase, liabilities decrease
3) Assets decrease, liabilities increase
4) Assets decrease, liabilities decrease

Answer 1

When Mayfly Company collects $42,000 cash on its accounts receivable, the effects on the accounting equation are that assets increase and liabilities decrease.

Step-by-step explanation:

When Mayfly Company collects $42,000 cash on its accounts receivable, it affects the accounting equation as follows:

1. Assets increase: Cash, which is an asset, increases by $42,000.
2. Liabilities decrease: There is no change in liabilities since the cash collected does not impact any debts or obligations.

Therefore, the correct answer is 2) Assets increase, liabilities decrease.