Multiple Choice
When recording the initial investment of cash and equipment by an owner in a newly formed business, which of the following journal entries is correct?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
Which of the following is the correct journal entry when a business receives \$10,000 in cash from the owner as an investment?
A
Debit Expense \$10,000; Credit Cash \$10,000
B
Debit Cash \$10,000; Credit Revenue \$10,000
C
Debit Cash \$10,000; Credit Owner's Capital \$10,000
D
Debit Owner's Capital \$10,000; Credit Cash \$10,000
Verified step by step guidance1
Step 1: Understand the nature of the transaction. The business is receiving \$10,000 in cash from the owner as an investment. This means the owner is contributing capital to the business, increasing the owner's equity and the business's cash balance.
Step 2: Identify the accounts involved. The two accounts affected are 'Cash' (an asset account) and 'Owner's Capital' (an equity account). Cash increases because the business receives money, and Owner's Capital increases because the owner's equity in the business grows.
Step 3: Determine the type of account and the impact. Cash is an asset account, and an increase in assets is recorded as a debit. Owner's Capital is an equity account, and an increase in equity is recorded as a credit.
Step 4: Write the journal entry. The correct journal entry is: Debit Cash \$10,000 (to record the increase in assets) and Credit Owner's Capital \$10,000 (to record the increase in equity).
Step 5: Verify the journal entry. Ensure that the debit and credit amounts are equal (\$10,000 each) and that the accounts accurately reflect the transaction. This ensures the accounting equation (Assets = Liabilities + Equity) remains balanced.
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