On 1 January 2020, a business started the day with Assets of $200 000, Liabilities of $120 000 and Owner's Equity of $80 000. On the 1 January, the first transaction that occurred was: The business purchased inventory on credit valued at $5 000 (Inv. 45) What would be the value of Assets after the transaction?

Question

BlackTom AI · Accepted Answer

Purchasing inventory on credit increases assets (Inventory) and increases liabilities (Accounts Payable) by the purchase amount. It does not immediately affect Owner’s Equity.

1. Relevant concepts
- Accounting equation: Assets = Liabilities + Owner’s Equity.
- Double-entry bookkeeping: every transaction affects at least two accounts; a credit purchase of inventory debits Inventory (asset) and credits Accounts Payable (liability).
- Owner’s Equity only changes with owner transactions, revenues, expenses, or drawings — not by buying inventory on credit.

2. Step-by-step reasoning
- Opening balances: Assets = $200,000; Liabilities = $120,000; Owner’s Equity = $80,000 (check: 200,000 = 120,000 + 80,000).
- Transaction: Purchased inventory on credit for $5,000.
- Journal entry: Debit Inventory (Asset) $5,000; Credit Accounts Payable (Liability) $5,000.

3. Intermediate calculations
- New Assets = Old Assets + Increase in Inventory = $200,000 + $5,000 = $205,000.
- New Liabilities = Old Liabilities + Increase in Accounts Payable = $120,000 + $5,000 = $125,000.
- Owner’s Equity remains = $80,000.
- Check accounting equation: 205,000 = 125,000 + 80,000 (true).

4. Why the correct answer is correct
- Because the purchase was on credit, the business gained an asset (inventory) worth $5,000 without spending cash, so total assets increase by $5,000 to $205,000.

5. Why the other options are incorrect
- a. $195,000 would indicate assets decreased by $5,000 (as if cash were paid), which is wrong for a credit purchase.
- b. $200,000 implies no change to assets, but inventory on credit increases assets.
- c. $125,500 is unrelated to the correct adjustments (it neither equals new assets nor any sensible intermediate).

6. Conclusion
The assets after the transaction are $205,000, so the correct choice is d. $205 000.

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