Question

If a company uses $1,510 of its cash to purchase supplies, the effect on the accounting equation would be

a. assets increase $1,510 and liabilities decrease $1,510
b. one asset increases $1,510 and another asset decreases $1,510, causing no effect
c. assets decrease $1,510 and equity decreases $1,51

Answer 1

When a company uses cash to purchase supplies, the effect on the accounting equation is a decrease in assets and equity by $1,510. The correct option is: b.

Step-by-step explanation:

The effect on the accounting equation when a company uses $1,510 of its cash to purchase supplies would be a decrease in assets by $1,510 and a decrease in equity by $1,510. This is because assets represent the resources owned by the company, and cash is one type of asset. When cash is used to purchase supplies, the company's cash assets decrease and its supplies assets increase. Equity represents the owner's claims to the assets of the company, so a decrease in assets also results in a decrease in equity.