How does purchasing equipment on credit affect the accounting equation?

How does purchasing equipment on credit affect the accounting equation?

• A. Assets increase, Liabilities increase
• B. Assets decrease, Liabilities increase
• C. Assets increase, Liabilities unchanged
• D. Assets increase, Equity decreases

Answer: (A)

When you purchase equipment on credit, you add an asset and create a liability. The accounting equation shows that assets must equal liabilities plus equity, so increasing equipment raises assets and also raises a liability (like accounts payable) by the same amount. Equity isn’t affected at the moment of the purchase, since you haven’t paid cash or incurred a revenue or expense that would change retained earnings. For example, if equipment costs 10,000, equipment rises 10,000 and accounts payable rises 10,000, keeping the equation balanced. Other patterns would require reducing assets or equity, which doesn’t happen when you buy on credit.

When you purchase equipment on credit, you add an asset and create a liability. The accounting equation shows that assets must equal liabilities plus equity, so increasing equipment raises assets and also raises a liability (like accounts payable) by the same amount. Equity isn’t affected at the moment of the purchase, since you haven’t paid cash or incurred a revenue or expense that would change retained earnings. For example, if equipment costs 10,000, equipment rises 10,000 and accounts payable rises 10,000, keeping the equation balanced. Other patterns would require reducing assets or equity, which doesn’t happen when you buy on credit.