Which of the following best describes the effect on the accounting equation when a company records a journal entry to purchase equipment for cash?

• A. One asset increases and another asset decreases; total assets remain unchanged.
• B. Assets decrease and liabilities decrease.
• C. Assets increase and liabilities increase.
• D. Assets increase and owner's equity increases.

Answer: (A)

Verified step by step guidance

1. Understand the accounting equation: Assets = Liabilities + Owner's Equity. This equation must always remain balanced.
2. Analyze the transaction: The company is purchasing equipment (an asset) and paying for it in cash (another asset). No liabilities or owner's equity are involved in this transaction.
3. Determine the effect on assets: The equipment account (asset) increases because the company now owns more equipment, while the cash account (asset) decreases because cash is used to pay for the equipment.
4. Evaluate the overall impact: Since one asset increases and another asset decreases by the same amount, the total assets remain unchanged. Liabilities and owner's equity are not affected.
5. Conclude: The correct description of the effect on the accounting equation is: 'One asset increases and another asset decreases; total assets remain unchanged.'