When a business buys a motor vehicle on credit, how does it affect the financial statements?
Understand the Problem
The question is asking about the impact on financial statements when a business purchases a motor vehicle using credit. It requires understanding basic accounting principles related to assets, liabilities, and capital.
Answer
Increases both assets and liabilities.
When a business buys a motor vehicle on credit, it increases both assets and liabilities on the balance sheet by the amount of the purchase.
Answer for screen readers
When a business buys a motor vehicle on credit, it increases both assets and liabilities on the balance sheet by the amount of the purchase.
More Information
The purchase will increase the asset side due to the new vehicle, and the liability side because of the credit (loan) used to finance it. Both sides of the accounting equation balance out, reflecting an increase in company assets and liabilities.
Tips
A common mistake is to assume the purchase affects the income statement immediately, but instead it initially only impacts the balance sheet.
Sources
AI-generated content may contain errors. Please verify critical information
