When a company purchases equipment on credit (i.e., signs a note payable or buys on account), which journal entry correctly records the transaction at the purchase date?

• A. Debit Equipment; Credit Notes Payable (or Accounts Payable).
• B. Debit Repairs and Maintenance Expense; Credit Notes Payable (or Accounts Payable).
• C. Debit Notes Payable (or Accounts Payable); Credit Equipment.
• D. Debit Equipment; Credit Cash.

Answer: (A)

Verified step by step guidance

1. Step 1: Identify the nature of the transaction. The company is purchasing equipment on credit, meaning it acquires an asset (equipment) but does not pay cash immediately; instead, it incurs a liability (notes payable or accounts payable).
2. Step 2: Determine the accounts affected. The asset account 'Equipment' increases, so it should be debited. The liability account 'Notes Payable' or 'Accounts Payable' increases, so it should be credited.
3. Step 3: Recall the rules of debit and credit for asset and liability accounts. Assets increase with debits and liabilities increase with credits.
4. Step 4: Formulate the journal entry. Debit the Equipment account to record the increase in assets, and credit the Notes Payable or Accounts Payable account to record the increase in liabilities.
5. Step 5: Verify that the journal entry balances. The total debits (increase in equipment) should equal the total credits (increase in liability), ensuring the accounting equation remains balanced.