Accounting Equation: Bell Company Purchase of Supplies
What is the effect of Bell Company purchasing supplies for $700 cash on the accounting equation?
Which of the following statements correctly show the effect of this transaction on the accounting equation?
- Assets will increase by $700, liabilities will remain unchanged, and stockholders' equity will increase by $700
- Assets will increase by $700, stockholders' equity will remain unchanged, and liabilities will increase by $700
- Assets remain unchanged, liabilities remain unchanged, and stockholders' equity will remain unchanged
- Assets will remain unchanged, liabilities will increase by $700, and stockholders' equity will remain unchanged
Answer:
The effect of Bell Company buying supplies for $700 cash on the accounting equation is that total assets remain unchanged, while liabilities and stockholders' equity also remain unchanged.
The correct option is Assets will remain unchanged, liabilities will remain unchanged, and stockholders' equity will remain unchanged.
When Bell Company purchases supplies for $700 cash, it affects the accounting equation in a specific way. The purchase of supplies leads to changes in different elements of the equation.
In this case, the cash account, which is an asset, decreases by $700 as cash is used to make the purchase. On the other hand, the supplies account, another asset, increases by $700 to reflect the newly acquired supplies.
As a result, the total assets of the company remain the same. Although there are changes in individual asset accounts, the overall value of assets on the balance sheet does not change.
Liabilities, representing the company's debts and obligations, are not affected by this transaction. Therefore, liabilities remain unchanged in the accounting equation.
Similarly, the stockholders' equity, which is the remaining value of the company after liabilities are subtracted from assets, also remains the same. Since both assets and liabilities stay constant, stockholders' equity is unaffected by the purchase of supplies.
It is essential to understand how different transactions impact the accounting equation to accurately track the financial position of a company. By analyzing each transaction's effect on assets, liabilities, and equity, businesses can maintain proper financial records and make informed decisions.