In a misappropriation scenario, which action will NOT result in a balanced accounting equation?

• A. Reducing owners' equity
• B. Creating an expense
• C. Decreasing a liability
• D. Decreasing another asset

Answer: (D)

The important idea is that every transaction must keep assets equal to liabilities plus owners’ equity. In misappropriation, you still record with dual entries, so a decrease in one part of the equation is offset by an increase or decrease elsewhere to keep the balance.

Misappropriation of cash typically reduces an asset (cash) and is offset by recognizing a corresponding expense or loss, which reduces owners’ equity. For example, debit a fraud loss (expense) and credit cash. That keeps both sides in balance: assets down, equity down by the same amount.

Reducing owners’ equity can occur through recording expenses or other losses, which must have a corresponding asset or liability entry on the other side to stay balanced. Creating an expense does the same: you debit the expense and credit cash or another asset, preserving the balance. Decreasing a liability is balanced by adjusting assets (for example, paying cash to settle the liability), so the equation stays balanced.

However, decreasing another asset by itself does not inherently produce a balancing entry on the other side. If you only decrease a different asset without a matching credit to a liability, revenue, or equity account, the accounting equation would fall out of balance. That’s why this action would not result in a balanced equation in a misappropriation scenario.