For the following transaction, determine the effect on the fundamental accounting equation: A company purchases equipment for \$5,000 cash. Which of the following statements is correct?

• A. Assets decrease by \$5,000; Liabilities decrease by \$5,000.
• B. Assets increase by \$5,000; Equity increases by \$5,000.
• C. One asset increases by \$5,000 and another asset decreases by \$5,000; total assets remain unchanged.
• D. Assets increase by \$5,000; Liabilities increase by \$5,000.

Answer: (C)

Verified step by step guidance

1. Step 1: Begin by recalling the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced after any transaction.
2. Step 2: Analyze the transaction. The company purchases equipment for \$5,000 cash. Equipment is an asset, and cash is also an asset. Therefore, this transaction involves only assets.
3. Step 3: Determine the effect on assets. The equipment account increases by \$5,000 because the company now owns more equipment. Simultaneously, the cash account decreases by \$5,000 because the company used cash to pay for the equipment.
4. Step 4: Verify the total effect on assets. Since one asset increases by \$5,000 and another asset decreases by \$5,000, the total assets remain unchanged. There is no impact on liabilities or equity in this transaction.
5. Step 5: Conclude that the correct statement is: 'One asset increases by \$5,000 and another asset decreases by \$5,000; total assets remain unchanged.' This ensures the fundamental accounting equation remains balanced.