Machinery is purchased on credit. What effect does this transaction have on the accounting equation?

Question

BlackTom AI · Accepted Answer

When machinery is purchased on credit, the company gains a new asset (the machinery) but incurs a liability (an accounts payable or other payable) to pay the supplier later. 
Option 1: 'Assets and liabilities increase' is consistent with this effect, because the asset side increases by the value of the machinery, and the liability side increases by the amount owed. 
Option 2: 'Assets and shareholders' equity increase' would imply a rise in equity, which does not occur in a credit purchase; there is no cash received or earnings recognized at this moment that would boost equity. 
Option 3: 'Liabilities increase and shareholders' equity decreases' would only be true if there were a reduction in equity, such as a loss or distribution, but a credit purchase does not reduce equity immediately. 
Option 4: 'Assets and liabilities decrease' contradicts the double-entry principle here, since both an asset (machinery) and a liability (amount due) are increasing, not decreasing. 
Thus, the transaction aligns with an increase in both assets and liabilities, matching Option 1.

Machinery is purchased on credit. What effect does this transaction have on the accounting equation?单项选择题

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