The purchase of office equipment on credit has what effect on the accounting equation?
To determine the effect of purchasing office equipment on credit on the accounting equation, we need to consider how it impacts the different elements of the equation:
The accounting equation is:
Assets = Liabilities + Equity
When the company purchases office equipment on credit, it has the following effects:
1. Assets: The office equipment is considered an asset because it provides future economic benefits to the company. So, there is an increase in the office equipment asset account.
2. Liabilities: By purchasing on credit, the company incurs a liability to the creditor or supplier. This means that the company owes money to the creditor for the office equipment. Consequently, there is an increase in the accounts payable liability account.
3. Equity: There is no direct impact on equity at the time of the purchase. However, over time, when the company pays off the creditor, it will result in a decrease in both assets and liabilities, simultaneously maintaining the equity portion of the accounting equation.
To summarize, the effect of purchasing office equipment on credit is an increase in assets (office equipment) and an increase in liabilities (accounts payable), resulting in no immediate impact on equity.