Liz, after qualifying at university and having several years' experience decides to set up her own dental practice. On 1 March she deposits $25 000 into a bank account she has opened for the practice. Which of the following represents the effect of this transaction on the accounting equation?
A) Increase in assets of $25 000; increase in equity of $25 000.
B) Increase in assets of $25 000; decrease in equity of $25 000.
C) Increase in assets of $25 000; increase in liabilities of $25 000.
D) Decrease in assets of $25 000; increase in equity of $25 000.

Question

Quizplus · Accepted Answer

When Liz deposited $25,000 into the bank account for her dental practice, it increased the assets of the business by $25,000 as cash is an asset. This transaction does not involve any liabilities, so there will be no increase in liabilities. As Liz is the owner of the business, her equity in the business also increases by $25,000. Therefore, the effect of the transaction on the accounting equation is an increase in assets of $25,000 and an increase in equity of $25,000.

Liz, After Qualifying at University and Having Several Years' Experience