What is the impact of purchasing equipment on credit versus paying cash?

• A. Purchasing on credit increases cash and assets; paying cash increases liabilities.
• B. Purchasing on credit increases assets (equipment) and liabilities (accounts payable); paying cash decreases cash.
• C. Purchasing on credit decreases assets; paying cash increases equity.
• D. Both methods increase liabilities only.

Answer: (B)

In double-entry accounting, buying equipment changes what the company owns and how that purchase is financed. When you buy on credit, you receive the equipment (an asset) and you incur a liability (you owe someone). So assets rise and liabilities rise at the same time.

If you pay cash for the equipment, you increase the equipment asset but decrease the cash asset, meaning total assets stay the same and there’s no change in liabilities or equity arising from the purchase itself.

This matches the idea that purchasing on credit increases both assets (equipment) and liabilities (accounts payable), while paying cash decreases cash (with equipment increasing as well). The other descriptions would misstate how cash movements or financing are reflected on the balance sheet.