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When a firm uses cash, which is a current asset, to settle its accounts payable, which is a current liability, the immediate effect is a reduction in both assets and liabilities by the same amount. For instance, if a company pays off $10,000 of its accounts payable using its cash reserves, the cash account decreases by $10,000, and the accounts payable account also decreases by $10,000. Logically, one might initially assume that because both sides of the equation decrease equally, the net worth remains unchanged. And under the purest mathematical lens, this assumption holds; the equation balances, and the total net worth figure does not move.
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