Question

An enterprise purchases short term equity investments with cash. Describe how would impact the Balance Sheet.

Answer 1

A Balance Sheet contain various components such as;

Assets, which are further sub- divided into Current Assets and Non current Assets.

Liabilities, which are further sub divided into Current Liabilities and Non Current Liabilities.

Equity, which consists of Common Stock, Retained earnings etc.

The basic Balance Sheet equation is Assets = Liabilities + Equity.

The transaction given is that an enterprise purchased Short Term Equity investments with Cash.

This transaction involves two accounts namely, Short Term Equity investment Account and Cash Account, both of them are current accounts.

This transaction will result in increase of Short Term equity investment and decrease in Cash account.

Since, both of them are current accounts this transaction will result in an increase in one current asset (short term investment) and a decrease in another (cash), which in the final analysis will not cause any change to the total amount Current Account portion of Balance sheet.

Since no other portion of balance sheet namely non current assets, liabilities, common stock etc are impacted by this transaction, it can be said that there is no impact on balance sheet due to this transaction.