Question

What specific accounts are recognized when a business purchases equipment on credit?

a) Accounts Payable and Equipment
b) Accounts Receivable and Revenue
c) Cash and Inventory
d) Depreciation Expense and Accumulated Depreciation

Answer 1

The specific accounts recognized when a business purchases equipment on credit are Accounts Payable and Equipment. This transaction reflects an increase in assets and liabilities, adhering to the double-entry bookkeeping system.

Step-by-step explanation:

When a business purchases equipment on credit, the specific accounts recognized are Accounts Payable and Equipment. The purchase increases the Equipment account on the balance sheet because it is an asset that the business now owns. Simultaneously, the Accounts Payable account also increases, reflecting the business's obligation to pay the supplier in the future.

This transaction is recorded as a debit to the Equipment account to increase assets, and a credit to the Accounts Payable account to represent the liability. This type of transaction illustrates the double-entry bookkeeping system, where every financial transaction affects at least two accounts. It's crucial for businesses to accurately record such transactions to maintain correct financial statements. The choice a) Accounts Payable and Equipment is correct because it accurately reflects the increase in assets and liabilities as a result of the purchase.