Final answer:
The purchase of office equipment on credit causes an increase in assets due to the value of the equipment and an increase in liabilities due to the obligation to pay for it later, which is true.
Step-by-step explanation:
When a company purchases office equipment on credit, its balance sheet reflects an increase in assets along with an increase in liabilities. In accounting, this transaction represents both the acquisition of a new asset, the office equipment, and the obligation to pay the supplier in the future, the liability.
The office equipment is recorded as an asset because it provides future economic benefits to the company, such as aiding in production or administrative tasks. The credit terms under which the equipment was purchased become a liability, reflecting the company's obligation to pay for the equipment at a later date.
A balance sheet, in general, provides a snapshot of a company's financial condition at a specific point in time. A bank's balance sheet functions similarly, by listing assets, such as cash in vaults and loans issued, and liabilities, such as customer deposits and debts. The concept of net worth is calculated as the difference between total assets and total liabilities. This net worth represents the bank's capital, the residual interest in the assets of the bank after liabilities have been deducted.
To conceptualize these transactions, accounting uses tools like the T-account, which helps in visualizing changes in the account balances. On a T-account, the left side represents assets while the right side represents liabilities and net worth, ensuring that the equation Assets = Liabilities + Net Worth always holds true.
Thus, in the scenario where office equipment is purchased on credit, it is true that there is an increase in both assets and liabilities on the company's balance sheet.