Answer :
Final answer:
Through applying the fundamental Accounting Equation, we can see that buying merchandise inventory with cash and on account leads to respective decreases and increases in the company's assets and liabilities, maintaining balance in the equation.
Explanation:
The transaction described - purchasing merchandise inventory both with cash and on account from Mr. Tahir - relates to the fundamental Accounting Equation: Assets = Liabilities + Owner's Equity. In this case, we start by recognizing that the total merchandise bought amounts to $100,000 ($80,000 paid with cash and $20,000 on account).
The cash payment of $80,000 will decrease the company's assets (cash), and acquiring inventory worth $80,000 will increase the company's assets (inventory) with the same amount. This keeps the equation balanced as both sides decrease and increase correspondingly.
Concerning the $20,000 of inventory purchased on account, this will increase the company's assets (inventory) and also increase the company liabilities (accounts payable). Once again, both sides of the equation increase, keeping it in balance.
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