What is the effect of a purchase of inventory on the accounting equation?

₹0.0

Question: What is the effect of a purchase of inventory on the accounting equation?

Options:

Correct Answer: Increase assets and increase liabilities

Solution:

A purchase of inventory increases assets (inventory) and may increase liabilities (if purchased on credit), thus affecting the accounting equation.

What is the effect of a purchase of inventory on the accounting equation?

What is the effect of a purchase of inventory on the accounting equation?

Step 1: Understand the accounting equation, which is Assets = Liabilities + Equity.
Step 2: When a business purchases inventory, it adds to its assets because inventory is considered an asset.
Step 3: If the inventory is purchased with cash, cash (another asset) decreases, but overall assets remain the same.
Step 4: If the inventory is purchased on credit, liabilities increase because the business now owes money.
Step 5: In both cases, the accounting equation remains balanced because the increase in assets is matched by an increase in liabilities or a decrease in another asset.

No concepts available.