Question 42

Increase in assets by $750 and increase in liability by $750

When a company purchases supplies on credit, it results in an increase in assets due to the acquisition of supplies, while simultaneously creating a liability because the amount is owed to the supplier. Thus, both assets and liabilities will increase by $750.

A) Increase in assets by $750 and increase in liability by $750

This option accurately reflects the transaction's impact on the accounting equation. The purchase of supplies adds $750 to the asset side for supplies and increases liabilities by the same amount, reflecting the obligation to pay the supplier.

B) Decrease in assets by $750 and decrease in liability by $750

This option is incorrect because the transaction does not lead to a decrease in assets. Instead, assets increase with the addition of supplies. Therefore, both assets and liabilities cannot decrease simultaneously in this scenario.

C) Decrease in assets by $750 and increase in liability by $750

This option is also incorrect as it suggests a decrease in assets, which contradicts the nature of the transaction. The purchase of supplies on credit increases assets rather than decreasing them.

D) Increase in assets by $750 and decrease in liability by $750

This option is incorrect because while it correctly identifies the increase in assets, it incorrectly states that liabilities decrease. The purchase on credit creates a liability, so it cannot decrease.

Conclusion

The correct answer is A, as it accurately describes the simultaneous increase in both assets and liabilities resulting from the credit purchase of supplies. Other options fail to recognize the nature of the transaction, either suggesting incorrect decreases in assets or liabilities, thereby misrepresenting the effects on the accounting equation.