Purchasing an asset on credit balances the accounting equation

Steps:

• Recognize the transaction: Business acquires an asset without cash payment, creating a payable.
• Apply double-entry bookkeeping: Debit the asset account to increase assets.
• Credit the liability account (e.g., accounts payable) to increase liabilities by the same amount.
• Check the equation (Assets = Liabilities + Capital): Both sides increase equally, so capital remains unchanged.

Why D is correct:

• Per the fundamental accounting equation, buying on credit increases assets and liabilities by identical amounts, maintaining balance without affecting capital (no income or expense).

Why the others are wrong:

• A and B: Liabilities increase, not decrease, as the business owes payment.
• C: Capital does not decrease; the transaction involves no equity adjustment like expenses.

Final answer: D