What is the effect on the balance sheet when the business buys a car for $25,000, paying a deposit of $5,000 and promising to pay the balance within 60 days?
A) increase asset vehicle by $20,000; increase liability accounts payable by $20,000
B) increase asset vehicle by $25,000; decrease asset bank by $5,000; increase liability accounts payable by $20,000
C) increase asset vehicle by $5,000; decrease asset bank by $5,000
D) none of the above

Question

Quizplus · Accepted Answer

When the business buys a car for $25,000 and pays a deposit of $5,000, the asset of the vehicle increases by $25,000 and the asset of the bank decreases by $5,000. The remaining balance of $20,000 is recorded as a liability under accounts payable until it is paid within 60 days. Therefore, the correct option is B. Option A is incorrect because it does not account for the deposit paid, and the liability should be recorded only for the outstanding balance. Option C is incorrect because it only records the deposit paid and does not account for the total cost of the vehicle. Option D is incorrect because the transaction has an effect on the balance sheet.

What Is the Effect on the Balance Sheet When the Business