The following table shows the effect of four separate transactions on the accounting equation. Which transaction represents the sale of goods on credit at a...
Question 1 Report
The following table shows the effect of four separate transactions on the accounting equation. Which transaction represents the sale of goods on credit at a profit?
| Transaction | Assets | Capital | Liabilities |
|---|---|---|---|
| 1 | No change | No change | No change |
| 2 | Increase | Increase | No change |
| 3 | Decrease | Decrease | No change |
| 4 | Increase | No change | Increase |
Answer Details
The correct answer is: Transaction 2.
A credit sale at a profit increases assets (trade receivables rise by the selling price) and increases capital (the profit element adds to the owner's equity). Liabilities are not affected because no borrowing or payable is created.
Transaction 1 (no change to anything) represents a swap within the same category, such as buying an asset by cheque. Transaction 3 (assets and capital both decrease) represents drawings or a loss. Transaction 4 (assets and liabilities increase, capital unchanged) represents a credit purchase or taking out a loan.
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