Machinery is purchased on credit. What effect does this transaction have on the accounting equation?

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BlackTom AI · Accepted Answer

When machinery is purchased on credit, the company gains a new asset (the machinery) but incurs a liability (an accounts payable or other payable) to pay the supplier later. 
Option 1: 'Assets and liabilities increase' is consistent with this effect, because the asset side increases by the value of the machinery, and the liability side increases by the amount owed. 
Option 2: 'Assets and shareholders' equity increase' would imply a rise in equity, which does not occur in a credit purchase; there is no cash received or earnings recognized at this moment that would boost equity. 
Option 3: 'Liabilities increase and shareholders' equity decreases' would only be true if there were a reduction in equity, such as a loss or distribution, but a credit purchase does not reduce equity immediately. 
Option 4: 'Assets and liabilities decrease' contradicts the double-entry principle here, since both an asset (machinery) and a liability (amount due) are increasing, not decreasing. 
Thus, the transaction aligns with an increase in both assets and liabilities, matching Option 1.

BACC012 Week 1: Practice Quiz

Machinery is purchased on credit. What effect does this transaction have on the accounting equation?

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