Henry is an accountant operating as a sole proprietor. On 10 April he performs work for a client to the value of $400 on credit. The effect of this transaction on the accounting equation is:
A) Cash at bank increases by $400; Accounts payable decreases by$400.
B) Equity increases by $400; Accounts payable increases by $400.
C) Accounts receivable increases by $400; Equity increases by $400.
D) Cash at bank increases by$400; Equity decreases by $400.

Question

Quizplus · Accepted Answer

Since the transaction is on credit, there is no effect on cash. Accounts receivable increases by $400 (an asset), and since the work is done by a sole proprietor, it increases his equity by $400. There is no effect on accounts payable since the transaction did not relate to any purchases on credit.

Henry Is an Accountant Operating as a Sole Proprietor