The credit purchase of an asset at cost price:Group of answer choicesdecreases assets and increases liabilities.increases assets and increases liabilities.leaves total assets constant.decreases assets and decreases liabilities.
Question
The credit purchase of an asset at cost price:Group of answer choicesdecreases assets and increases liabilities.increases assets and increases liabilities.leaves total assets constant.decreases assets and decreases liabilities.
Solution
The correct answer is: increases assets and increases liabilities.
Here's why:
When a company makes a credit purchase of an asset at cost price, it means the company is buying an asset but will pay for it at a later date. This transaction affects the company's balance sheet in two ways:
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Increase in Assets: The asset that the company has purchased is added to its assets. This increases the total value of the company's assets.
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Increase in Liabilities: Since the company has not yet paid for the asset, the amount it owes for the asset is recorded as a liability. This increases the total value of the company's liabilities.
So, a credit purchase of an asset at cost price increases both assets and liabilities.
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