Answer to Question #245532 in Accounting for Magdalena

Question

An accountant has debited an asset account for $2,000 and credited an expense account for $4,000. Which of the following would be the correct way to complete the recording of the transaction?

Credit an asset account for $4,000.

Credit a liability account for $2,000.

Credit a shareholders’ equity account for $2,000.

Debit a shareholders’ equity account for $2,000.

Answer 1

Solution:

The correct answer is Debit a shareholders’ equity account for $2,000.

By doing so, it will correct the account and hence the accounts will balance.

Assets = Liabilities + Equity

Expenses impact the equity of the company; thus, erroneous expenses transactions can be corrected through the equity account. Since an expense account was overstated by $2,000, you should debit the shareholder’s equity account by the overstated figure to correct the expense account.