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What is the effect of a $500 purchase of inventory on the trial balance?

Practice Questions

Q1
What is the effect of a $500 purchase of inventory on the trial balance?
  1. Increase in assets and increase in liabilities
  2. Increase in assets and decrease in equity
  3. Increase in assets and increase in expenses
  4. No effect on the trial balance

Questions & Step-by-Step Solutions

What is the effect of a $500 purchase of inventory on the trial balance?
  • Step 1: Understand that a purchase of inventory means you are buying goods to sell later.
  • Step 2: Recognize that inventory is an asset, which means it is something valuable that the business owns.
  • Step 3: When you purchase $500 worth of inventory, you increase the inventory account by $500.
  • Step 4: If you do not pay cash for the inventory, you will owe money, which is a liability.
  • Step 5: This means you also increase accounts payable (the amount you owe) by $500.
  • Step 6: In summary, the trial balance will show an increase of $500 in assets (inventory) and an increase of $500 in liabilities (accounts payable).
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