Difficulty: Easy

Average Score: 100%

During the year a company purchased $750 of supplies on credit. What is the impact on the accounting equation?

Rationale

Increase in assets by $750 and increase in liability by $750.

When a company purchases supplies on credit, it acquires an asset (the supplies) while simultaneously incurring a liability (the amount owed). This transaction affects the accounting equation by increasing both the assets and liabilities by the same amount, maintaining the equation's balance.

A (Increase in assets by $750 and increase in liability by $750) CORRECT

This choice accurately reflects the transaction of purchasing supplies on credit. The supplies, an asset, increase by $750, and the liability, representing the amount owed to the supplier, also increases by $750. This maintains the accounting equation's balance of Assets = Liabilities + Equity.

B (Decrease in assets by $750 and decrease in liability by $750) YOUR ANSWER

This option incorrectly suggests a decrease in both assets and liabilities. Purchasing supplies on credit does not reduce the company's assets or liabilities; instead, it increases them. Therefore, this choice does not represent the impact of the transaction.

C (Decrease in assets by $750 and increase in liability by $750) YOUR ANSWER

This choice incorrectly indicates that assets would decrease. In reality, the purchase of supplies adds to the company's assets rather than reducing them. The increase in liabilities is correct, but the decrease in assets makes this option inaccurate.

D (Increase in assets by $750 and decrease in liability by $750) YOUR ANSWER

This option is also incorrect as it suggests that while assets increase due to the purchase, liabilities decrease. Since the purchase was made on credit, the liability actually increases, not decreases.

Conclusion

In accounting, purchasing supplies on credit leads to an increase in both assets and liabilities, as the company acquires an asset while taking on a corresponding obligation. The transaction exemplifies the principle that every financial event impacts the accounting equation, ensuring it remains balanced, thereby reinforcing the foundational concepts of double-entry accounting.

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