When an organisation purchases a machine for cash, which of the following is true?Question 3Select one:a.Total assets increase.b.Total liabilities decrease.c.Total expenses increase.d.Total equity stays the same
Question
When an organisation purchases a machine for cash, which of the following is true?Question 3Select one:a.Total assets increase.b.Total liabilities decrease.c.Total expenses increase.d.Total equity stays the same
Solution
When an organization purchases a machine for cash, the following is true:
d. Total equity stays the same.
Here's the step by step explanation:
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The organization spends cash to buy a machine. This means one asset (cash) decreases, but another asset (machine) increases. The total assets remain the same because the decrease in cash is offset by the increase in the value of the machine.
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The purchase does not involve any borrowing or other liabilities, so total liabilities do not change.
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The purchase of a machine is a capital expenditure, not an expense. So, total expenses do not increase.
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Since neither the total assets nor the total liabilities change, the equity (which is assets minus liabilities) also stays the same.
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