Question

If the total assets increase by $10,000 and the total liabilities decrease by $10,000 - what will happen to the capital? A. Capital will increase by $20,000B. Capital will increase by $10,000C. Capital will by unchanged ($0)D. Capital will decrease by $10,000E. Capital will decrease by $20,000

Answer 1

To resolve the question, we need to understand the relationship between assets, total liabilities and capital.

Capital is the value of the investment in the business by the owner.

Liabilities are the debts owed by the firm

The relationship below can be used to calculate the answer

We can then apply the formula

`\begin{gathered} \text{Assets}-\text{liabilities}-\text{capital=0} \\ \text{capital=Assets-Liabilities} \end{gathered}`

The given values are

`\begin{gathered} \text{Assets}=\text{ +\$10000} \\ \text{Liabilities =- \$10000 (Because it decreases)} \end{gathered}`

Hence, the capital will be

`\begin{gathered} \text{Capital= 10000-(-10000)} \\ \text{Capital= \$10000+ \$10000} \\ \text{Capital= \$20000} \end{gathered}`

This means that the capital will increase by $20,000