Question

Dr. Peabody contributed $5,000 in cash to the company. Which of the following statements is correct?

A. Cash is debited $5,000; capital is credited $500.
B. Capital is debited $5,000; cash is credited $5,000.
C. Cash is credited $5,000; capital is credited $5,000.
D. Cash is debited $5,000; capital is credited $5,000.

Answer 1

D. Cash is debited $5,000; capital is credited $5,000.

Step-by-step explanation:

The action by Mr. Peabody will increase both cash and capital accounts by $5000 each. As per the accounting equation,( Assets = owners equity + liabilities) cash and capital are on the opposites sides. Cash is an asset, while capital is equity.

An increase in an asset is a debit, while an increase in capital is credited. In this case, the cash account will be debited by $5000, while the same amount will credit the capital account.