A sole trader introduces cash of Rs. 50,000 into the business as additional capital. What is the immediate effect?
Correct answer: A. Cash and capital both increase by Rs. 50,000
- A. Cash and capital both increase by Rs. 50,000
- B. Cash increases and liabilities increase by Rs. 50,000
- C. Cash decreases and capital increases by Rs. 50,000
- D. Profit increases by Rs. 50,000 without changing capital
Explanation
Additional capital is an investment by the owner, not business revenue. The business receives cash and the owner's capital increases by the same amount.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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