Jane is an accountant operating as a sole proprietor. On 1 February she does some work for a client on credit who she invoices for $120. On 10th of February the client pays his account and Jane banks the $120. Which of the following represents the effect of the receipt of cash transaction on the accounting equation for Jane's practice?
A) Increase in cash at bank $120; increase in equity $120.
B) Increase in cash at bank $120; decrease in asset accounts receivable $120.
C) Increase in cash at bank $120; increase in asset accounts receivable $120.
D) Increase in cash at bank $120; decrease in equity $120.

Question

Quizplus · Accepted Answer

When Jane receives the payment from her client, her cash at bank account increases by $120 as she banks the money. At the same time, her accounts receivable account decreases by the same amount as her client has paid her outstanding debt. Therefore, option (B) is the correct answer.

Option (A) is incorrect because there is no increase in equity as Jane has not yet earned any profit.

Option (C) is incorrect because there cannot be an increase in both cash at bank and accounts receivable accounts as they are opposites of each other.

Option (D) is incorrect because there is no decrease in equity as it is not an expense that needs to be paid off.

Jane Is an Accountant Operating as a Sole Proprietor