A business purchases furniture for cash. What is the effect on the accounting equation?
Correct answer: B. One asset increases and another asset decreases
- A. Assets increase and capital increases
- B. One asset increases and another asset decreases
- C. Assets decrease and liabilities increase
- D. Liabilities increase and capital decreases
Explanation
Furniture increases one asset, while the cash used for the purchase decreases another asset. Therefore, total assets and the combined amount of liabilities and capital remain unchanged.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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