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ACCA Applied Knowledge · Financial Accounting · Double-entry bookkeeping principles including the maintenance of accounting records

Kestrel Ltd buys office furniture for $4,000 on credit from a supplier. What is the effect of this transaction on the accounting equation?

Buying furniture on credit increases assets (furniture) by $4,000 and increases liabilities (trade payables) by $4,000. Equity does not change because no profit is earned and the owner invests nothing, so the accounting equation stays in balance.

  1. AAssets increase by $4,000 and liabilities increase by $4,000Correct
  2. BAssets increase by $4,000 and equity increases by $4,000
  3. CAssets increase by $4,000 and other assets decrease by $4,000
  4. DLiabilities increase by $4,000 and equity decreases by $4,000

Explanation

Furniture is an asset, so assets rise by $4,000. Because it is bought on credit, a payable of $4,000 arises, so liabilities rise by the same amount. Equity is unaffected. Option B is wrong because no owner contribution or profit arises.

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