What is the journal entry to record the purchase of equity investments?

When recording the purchase of equity investments, the transaction must reflect the exchange of cash for the investments made. The correct journal entry involves debiting the Equity Investments account, which represents an increase in the asset due to the purchase. This signifies that the company has acquired more equity investments, thus increasing its asset base.

Simultaneously, cash is credited, reflecting the outflow of cash used to acquire those investments. Crediting the Cash account shows a decrease in this asset, as cash is used in the transaction. Therefore, the correct representation of this transaction is to debit Equity Investments and credit Cash, effectively accounting for the increase in investments and the reduction of available cash.

Overall, this approach follows the double-entry accounting principle, ensuring that both sides of the equation are balanced while accurately depicting the nature of the transaction.