CA Foundation · Accounting · Theoretical Framework
Arun Enterprises purchased furniture worth ₹40,000 on credit from Bharat Furnishers. What is the effect of this transaction on the accounting equation?
Assets increase by ₹40,000 and liabilities increase by ₹40,000. The furniture received is an asset, and since payment is due to the supplier, a creditor liability arises for the same amount. Capital remains unchanged, so the accounting equation stays balanced.
- AAssets increase by ₹40,000 and capital increases by ₹40,000
- BAssets increase by ₹40,000 and liabilities increase by ₹40,000Correct
- CAssets decrease by ₹40,000 and liabilities increase by ₹40,000
- DAssets increase by ₹40,000 and liabilities decrease by ₹40,000
Explanation
Furniture is an asset and increases by ₹40,000. The amount is unpaid, so creditors (a liability) rise by the same amount. Capital is unaffected, so the equation Assets = Capital + Liabilities remains balanced. Increasing capital would be wrong since no owner investment occurred.
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