Question

Henry is an accountant operating as a sole proprietor. On 10 April he performs work for a client to the value of $400 on credit. The effect of this transaction on the accounting equation is: Select one: a. Equity increases by $400; Accounts payable increases by $400. b. Cash at bank increases by $400; Accounts payable decreases by $400. c. Cash at bank increases by$400; Equity decreases by $400. d. Accounts receivable increases by $400; Equity increases by $400.

Answer 1

Answer: d

This is the on-account service performed by the firm. Since the cash is not received yet, Accounts Receivable should increase. The other effect goes to the Equity because of revenue earning; therefore, it increases Equity too.

Other options are not correct:

Option a: there would be no effect on Accounts Payable, since there is a sale, but not purchase.

Option b: Cash can’t be increased, since it is not collected at the time of selling.

Option c: Equity can’t be increased, since there is an earning of the firm.