Question

Celery Company has assets of $150,000, liabilities of $90,000, and equity of $60,000. It buys supplies for cash $5,000. What effect would this transaction have on the accounting equation?

Answer 1

Assets increase by $5,000 increase, equity decrease by $5000

Step-by-step explanation:

The accounting equation is expressed as below.

Assets = Liabilities + shareholders equity

• Assets are valuable items that the business owns.
• Liabilities are the debts of the business.
• Shareholder equity is the owner's capital, plus the retained earnings.

The transaction by Celery Company involves buying supplies valued at $5000 by cash.

• Since celery paid cash, no liabilities were incurred. The shareholder money (Equity) decreased by $5000.
• Supplies worth $5000 were acquired. The suppliers belong to the business; they are valuable items( assets) to the business.