Question

On June 2, Alice Roberts invested $5,000 of her own money in a business called Roberts Employment Agency. Which of the following statements is true regarding this transaction?

1) The asset account Cash in Bank is increased. Increases in asset accounts are recorded as debits.
2) The owner's capital account Alice Roberts, Capital is increased. Increases in the owner's capital account are recorded as credits.
3) The liability account Accounts Payable is increased. Increases in liability accounts are recorded as debits.
4) The expense account Salaries Expense is increased. Increases in expense accounts are recorded as credits.

Answer 1

Alice Roberts' investment of $5,000 into her business is an equity transaction, not an expense. It results in a debit to Cash and a credit to Owner's Equity, and is not related to an increase in the Salaries Expense account.

Step-by-step explanation:

The transaction involving Alice Roberts investing $5,000 into Roberts Employment Agency is an investment transaction, not an expense transaction. Therefore, the statement 'The expense account Salaries Expense is increased. Increases in expense accounts are recorded as credits.' is incorrect in the context of this transaction. When Alice Roberts invests money into her business, this is considered an owner's equity transaction and it would typically result in a debit to the Cash account and a credit to the Owner's Equity or Capital account in the business's accounting records.

An expense account such as Salaries Expense would only be increased if the business were actually incurring a salary expense. When expense accounts are indeed increased, it is correct that they are recorded as debits, not credits, because expenses reduce equity.

To illustrate an accounting profit, consider a firm with sales revenue of $1 million. If the firm spent $600,000 on labor, $150,000 on capital, and $200,000 on materials, its accounting profit would be the sales revenue minus these explicit costs, which would amount to $50,000. However, when evaluating economic success, implicit costs such as opportunity cost must be taken into account in addition to the explicit costs.