Final answer:
When an owner contributes cash to a business, it increases both assets and equity, not decreasing equity as the question suggests. Owner's contributions, like funds from angel investors or venture capitalists, improve the financial strength of the company.
Step-by-step explanation:
When an owner contributes cash into a business, it is true to say the business's assets increase. However, the statement that the business's equity decreases is false. When the owner injects cash into the company, this cash is an asset, and on the other side of the accounting equation, equity is increased by an equal amount. This is because the owner's contribution is called owner's equity or capital, which is part of total equity. Therefore, both assets and equity go up with an owner's contribution.
In the context of funding sources for small businesses, for instance, an owner might use personal savings or acquire funds from angel investors. This initial infusion of cash bolsters the company's financial position without requiring immediate repayments or interest, unlike debt financing methods such as loans or bonds. Additionally, some business owners may seek capital from venture capitalists, who provide funding in exchange for a substantial portion of the firm and may have a significant role in management and strategy to ensure their investment is well-managed.