Question

Alpha Company has assets of $620,000, liabilities of $260,000, and equity of $360,000. It buys office equipment on credit for $85,000. What would be the effects of this transaction on the accounting equation?

Answer 1

Answer: Increase in assets and increase in liabilities.

Explanation: As we know that accounting equation is denoted as :-

Assets = capital + liabilities

where,

. Assets are the resources owned by the firm for the generation of revenue.

. Capital means the funds procured by company in the form of contribution by the owners or in the form of debt.

. Liabilities are the obligations on the company.

.

Purchase of office equipment on credit will result in increase in assets as office equipment is used for administration purposes and as it is purchased on credit it will also increase its liabilities.