A business's assets are $200,000, and its liabilities are $80,000. If the business purchases equipment for $20,000 using cash, what is the new value of equity?
Understand the Problem
The question requires calculating the new value of equity after a business purchases equipment using cash. The fundamental accounting equation (Assets = Liabilities + Equity) is used to determine the equity. The purchase of equipment with cash does not affect the total assets, therefore the equity remains unchanged.
Answer
The equity remains unchanged.
Answer for screen readers
The equity remains unchanged.
Steps to Solve
- Understanding the Accounting Equation
The fundamental accounting equation is:
$$ Assets = Liabilities + Equity $$
- Impact of Purchasing Equipment with Cash on Assets
When a company purchases equipment with cash, one asset (cash) decreases, and another asset (equipment) increases. The total value of assets remains the same.
- Impact on Liabilities
The purchase of equipment with cash does not affect liabilities, so liabilities remain unchanged.
- Determining the Impact on Equity
Since total assets and liabilities are unchanged, the equity remains the same, as shown by rearranging the accounting equation: $$ Equity = Assets - Liabilities $$. If $Assets$ and $Liabilities$ do not change, then $Equity$ will not change.
The equity remains unchanged.
More Information
This problem illustrates a basic principle of accounting: using one asset to purchase another does not change the total value of assets or the equity.
Tips
A common mistake is to assume that any transaction will affect equity. However, if one asset is simply exchanged for another (like cash for equipment), the overall value of assets remains constant, and thus equity is not affected.
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