Final answer:
The correct answer is A: Assets and Liabilities. As the sole trader receives £1,000, the assets increase due to the cash receipt, and the liabilities decrease as the overdraft is reduced, with no effect on the capital.
Therefore, both assets and liabilities are affected by this transaction.
Step-by-step explanation:
The question asks which element(s) of the accounting equation will change when a sole trader who is £5,000 overdrawn receives £1,000 from a credit customer.
When the trader receives £1,000, this amount will be deposited into the bank account, thus reducing the overdraft. Therefore, the bank account balance will increase (assets increase) and the overdraft (part of liabilities) will decrease.
In the accounting equation, assets = liabilities + owner's equity (or capital), the receipt of the £1,000 affects both the assets and the liabilities.
The assets will increase by £1,000 due to the receipt of cash, and the liabilities will decrease as the overdraft reduces by the same amount. No change occurs in the owner's equity as a result of this transaction.
As a result of the transaction, the correct answer is A: Assets and Liabilities. The sole trader's assets increase by £1,000, reducing the liabilities (overdraft) without affecting the capital.