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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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The effects of purchasing inventory on credit are to:

a. increase assets and increase liabilities.

b. increase assets and increase stock-holders’ equity.

c. decrease assets and decrease stock-holders’ equity.

d. decrease assets and decrease liabilities.

To determine

Introduction: The first step involved in the process of recording economic events in any business is to analyze the transaction. Transaction analysis is the process of analyzing each transaction to determine the effect of each transaction in two parts or dual effect on each element of an accounting equation so that the equation is in balance.

To select- An option for purchasing inventory on credit.

Explanation

Explanation for correct answer- A transaction where an asset is purchased on credit is called purchase on account and the liability created is called accounts payable. If the inventory is purchased on credit, there are two things involved:

  1. When the inventory is purchased, the asset of the company increases.
  2. When the inventory is purchased on credit where the payment for purchase of asset is made on a later date, the liability of the company to pay for the inventory also increases.

Thus, Option A is correct which means that when purchase of inventory is made on credit, there is increase in asset and increase in liability.

Explanation for incorrect answer-

Option B- When inventory is purchased on credit, there is increase in asset and increase in liability for payment accrued towards seller of inventory...

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