Multiple Choice
If an entrepreneur says they are using "bootstrap financing," which type of accounting is most relevant for tracking their personal investments and internal funding sources?
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1. Introduction to Accounting
Types of Accounting
Multiple Choice
In financial accounting, what is the effect on the accounting equation when a company goes into debt by taking out a loan?
A
Assets increase and liabilities increase.
B
Equity decreases and liabilities decrease.
C
Assets decrease and equity increases.
D
Liabilities decrease and assets increase.
Verified step by step guidance1
Understand the accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.
Analyze the transaction: When a company takes out a loan, it receives cash (an asset), and simultaneously incurs a liability (the obligation to repay the loan).
Determine the effect on assets: The cash received from the loan increases the company's assets.
Determine the effect on liabilities: The loan creates a liability, increasing the company's total liabilities.
Conclude the impact: Since the loan does not directly affect equity, the accounting equation remains balanced with an increase in both assets and liabilities.
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