Multiple Choice
Which of the following best describes the two steps for opening an account in the context of journal entries for business formation?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
When forming a business, the owner invests \$10,000 cash and equipment valued at \$5,000 into the company. Which of the following is the correct journal entry to record this transaction?
A
Debit Cash \$10,000; Debit Equipment \$5,000; Credit Owner's Capital \$15,000
B
Debit Owner's Capital \$15,000; Credit Cash \$10,000; Credit Equipment \$5,000
C
Debit Owner's Capital \$15,000; Credit Cash \$15,000
D
Debit Cash \$5,000; Debit Equipment \$10,000; Credit Owner's Capital \$15,000
Verified step by step guidance1
Step 1: Understand the transaction. The owner is investing cash and equipment into the business. This increases the assets of the business (Cash and Equipment) and also increases the Owner's Capital account, which represents the owner's equity in the business.
Step 2: Identify the accounts involved. The accounts affected are Cash (an asset), Equipment (an asset), and Owner's Capital (an equity account).
Step 3: Determine the nature of each account change. Cash and Equipment are increasing, so they will be debited. Owner's Capital is increasing, so it will be credited.
Step 4: Apply the accounting equation (Assets = Liabilities + Equity). Since the owner is contributing assets (Cash and Equipment) to the business, the increase in assets is balanced by an increase in equity (Owner's Capital).
Step 5: Write the journal entry. Debit Cash for \$10,000, Debit Equipment for \$5,000, and Credit Owner's Capital for \$15,000. This ensures the transaction is properly recorded in the books.
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