Question

Alpha Company has assets of $630,000, liabilities of $265,000, and equity of $365,000. It buys office equipment on credit for $90,000. What would be the effects of this transaction on the accounting equation?

Answer 1

Assets and liabilities increase by $90,000.

$720,000 = $355,000 + $365,000

Step-by-step explanation:

The accounting equation is:

Assets = Liabilities + Equity

Equation before transaction:

$630,000 = $265,000 + $365,000

If Alpha Company buys on credit, this means they borrow money to pay for the equipment.

Borrowed money, either as a loan or an account payable, is a liability. This increases because by borrowing money, the company owes more money.

Office equipment is an asset. This increases because you bought more equipment that the company now owns.

Both assets and liabilities increase by $90,000.

Showing transaction:

($630,000 + $90,000) = ($265,000 + $90,000) + $365,000

Equation after transaction:

$720,000 = $355,000 + $365,000