Final answer:
The purchase of equipment is not reported as an expense on the Income Statement in the year it is purchased. The $100,000 paid for the piece of equipment is recorded as a long-term asset on the Balance Sheet and is depreciated over time. Business investments in equipment show a company's anticipation of future economic growth and profitability.
Step-by-step explanation:
When a company purchases a piece of equipment for cash, this transaction affects the company's financial statements.
However, this transaction does not appear as an equipment expense on the Income Statement in the year it is purchased. Instead, the cost of the equipment is capitalized and recorded as an asset on the Balance Sheet under property, plant, and equipment (PP&E). The $100,000 paid for the equipment would therefore be recorded as a long-term asset rather than an immediate expense. Over time, the equipment will be expensed through depreciation, recognizing the cost based on the asset's useful life. This process aligns the expense with the revenue generated from the use of the equipment, following the matching principle in accounting.
Business investment in new equipment can be a critical component in fostering economic growth and can reflect a company's expectation of future demand and profitability. As seen historically, even during periods of slow economic growth, firms may invest significantly in the hope of future returns. The increase in corporate profits after a recession, as noted in the provided reference, can be partly attributed to such strategic business investments.