A sole trader receives a bank loan of Rs. 200,000 directly into the business bank account. What is the immediate accounting effect?
Correct answer: A. Assets increase and liabilities increase
- A. Assets increase and liabilities increase
- B. Assets increase and revenue increases
- C. Expenses increase and liabilities decrease
- D. Capital increases and revenue decreases
Explanation
The bank balance increases by Rs. 200,000, while the amount owed to the bank creates a liability of the same amount. The loan is not revenue because it must be repaid.
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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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Accounting is on 3 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
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