Question

Howard Company purchased $300 of supplies on account. How this purchase will affect Howard's accounting equation?

Answer 1

Howard Company's $300 purchase of supplies on account increases both assets and liabilities by $300 in the accounting equation, keeping the overall financial balance intact. There is no effect on equity from this transaction.

Step-by-step explanation:

When Howard Company purchases $300 of supplies on account, their assets increase due to the addition of supplies, while their liabilities increase by the same amount because the purchase is made on account. This transaction affects the accounting equation as follows:

• 
  
• Assets = Liabilities + Equity
• 
  
• + $300 (Supplies) = + $300 (Accounts Payable) + $0 (Equity unchanged)

The accounting equation maintains balance because both sides increase by $300. The purchase increases Howard's supplies (assets) and also increases accounts payable (liabilities), with no immediate effect on equity. This example illustrates how transactions involving purchases on account affect a company's financial position without disrupting the fundamental accounting principle that 'assets must equal liabilities plus shareholders' equity'.