Question

A sole trader increases the business's number of motor vehicles by adding his own car to the business's fleet.

Which element(s) of the accounting equation will change due to this transaction?
A Assets only
B Capital only
C Assets and capital
D Assets and liabilities

Answer 1

When a sole trader adds his own car to the business's fleet, it will change both the assets and capital elements of the accounting equation.

Step-by-step explanation:

When a sole trader adds his own car to the business's fleet, it will change both the assets and capital elements of the accounting equation. Let's break it down:

1. Assets: Adding the car to the business's fleet increases the total value of assets. The car will be recorded as a new asset on the left side of the T-account. This means that the assets portion of the accounting equation will increase.
2. Capital: Since the sole trader is using his own car for the business, he is contributing a personal asset to the business. This contribution increases the owner's equity, which is represented by the capital element of the accounting equation. The capital portion of the equation will also increase.

In summary, option D (Assets and liabilities) is incorrect because the transaction does not involve any change in liabilities. The correct answer is option C (Assets and capital), as both assets and capital elements of the accounting equation will change due to the sole trader adding his own car to the business's fleet.