Question

What are the effects on a company's accounting equation when it records merchandise purchased for cash?...

What are the effects on a company's accounting equation when it records merchandise purchased for cash?

A. Assets and liabilities increase B. Total assets remain unchanged C. Assets and stockholders' equity decrease D. Assets and stockholders' equity increase

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Answer #1

Correct Option is B) Total Assets Remain Unchanged .

Explanation:

The Journal entry to record this transaction is ....

Merchandise (Dr.)

Cash (Cr.)   

Merchandise and Cash both are part of the assets side of the balance sheet .Therefore when purchase of merchandise will increase the total assets side parallelly cash payment for acquiring that merchandise will decrease the total assets side with the same amount resulting in no change in the total assets side of the balance sheet.Suppose the merchandise is of $1,000 so merchandise will increase the assets side by $1,000 and cash will be decreased by the same amount $1,000 resulting in total assets side remain unchanged.

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