Which statement best describes how to determine total liabilities and equity at period end?

Which statement best describes how to determine total liabilities and equity at period end?

• A. Only cash transactions affect liabilities and equity.
• B. All transactions affect liabilities and equity.
• C. Items impacting IS will flow through into the retained earnings section of equity. Some transactions may not impact liabilities and equity. Some transactions may have two offsetting impacts.
• D. Retained earnings are never affected by transactions.

Answer: (C)

Understand how period-end liabilities and equity come from the accounting equation and how results from operations affect equity through the income statement. When the income statement reports profits or losses, those changes flow into retained earnings, which is a component of equity, so items on the income statement ultimately alter equity through retained earnings. At the same time, not every transaction changes liabilities or equity: some moves are purely within assets, such as exchanging one asset for another, which leaves the liabilities and equity totals unchanged. And some transactions produce two offsetting effects on the balance sheet—like paying a liability (cash falls and liabilities fall) or financing an asset purchase (assets rise and liabilities rise)—so the net effect on total liabilities and equity can be zero. This combination best describes how to determine total liabilities and equity at period end.

Understand how period-end liabilities and equity come from the accounting equation and how results from operations affect equity through the income statement. When the income statement reports profits or losses, those changes flow into retained earnings, which is a component of equity, so items on the income statement ultimately alter equity through retained earnings. At the same time, not every transaction changes liabilities or equity: some moves are purely within assets, such as exchanging one asset for another, which leaves the liabilities and equity totals unchanged. And some transactions produce two offsetting effects on the balance sheet—like paying a liability (cash falls and liabilities fall) or financing an asset purchase (assets rise and liabilities rise)—so the net effect on total liabilities and equity can be zero. This combination best describes how to determine total liabilities and equity at period end.